Risk Measurement and Hedging: With and Without Derivatives

Financial Management, Vol. 29, Iss. 4, Winter 2000

Posted: 23 Jun 2001


This paper examines a setting in which the derivatives strategies of two firms are known, but completely different. One firm aggressively hedges its risk using derivatives. The other firm uses a combination of operating and financial decisions, but no derivatives, to manage its risk. The different choice of methods is a result of different abilities to adjust operating costs and different needs for investment capital. Managerial incentives also play a role. Although risk-averse managers have an incentive to reduce risk, how and how much they hedge depends on how they are compensated.

Suggested Citation

Petersen, Mitchell A. and Thiagarajan, S. Ramu, Risk Measurement and Hedging: With and Without Derivatives. Financial Management, Vol. 29, Iss. 4, Winter 2000. Available at SSRN: https://ssrn.com/abstract=267750

Mitchell A. Petersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1281 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
847-467-1281 (Phone)
847-491-5719 (Fax)

S. Ramu Thiagarajan

Mellon Capital Management Corporation ( email )

595 Market Street
Suite 3000
San Francisco, CA 94105
United States
415-975-3512 (Phone)

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