How do Firms Hedge in Financial Distress?
65 Pages Posted: 20 Apr 2022
Date Written: March 17, 2022
Abstract
We examine how firms hedge in financial distress. Using hand-collected data from oil and gas producers, we find that derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three-way collar strategy that combines buying put options and selling put and call options with differing strike prices. We show that because liquidity demand varies with the degree of financial distress, the three-way collar strategy is the optimal risk management strategy that preserves incentives for future growth.
Keywords: corporate hedging; risk management; financial distress; economic distress
JEL Classification: G30, G32
Suggested Citation: Suggested Citation