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Does Hedging with Derivatives Reduce the Market's Perception of Credit Risk?

53 Pages Posted: 19 Aug 2015 Last revised: 25 Jul 2016

Sriya Anbil

Board of Governors of the Federal Reserve System

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 24, 2016

Abstract

Risk management is the most widely-cited reason that non-financial corporations use derivatives. If hedging programs are effective, then firms using derivatives should have lower credit risk than those that do not. Surprisingly, we find that firms with derivatives positions without a hedge accounting designation (typically higher basis risk) have higher CDS spreads than firms that do not hedge at all. We do not find evidence that these non-designated positions are associated with future credit realizations. We examine alternative explanations and find evidence that is consistent with a market penalty for high basis risk positions when overall market conditions are poor.

Keywords: risk management, derivatives, SFAS 133, SFAS 161, basis risk

JEL Classification: G32

Suggested Citation

Anbil, Sriya and Saretto, Alessio and Tookes, Heather, Does Hedging with Derivatives Reduce the Market's Perception of Credit Risk? (July 24, 2016). Available at SSRN: https://ssrn.com/abstract=2643920 or http://dx.doi.org/10.2139/ssrn.2643920

Sriya Anbil

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)

HOME PAGE: http://www.utdallas.edu/~axs125732

Heather Tookes (Contact Author)

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

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