Corporate hedging fragility in the over-the-counter market

57 Pages Posted: 23 May 2018 Last revised: 9 Mar 2022

See all articles by Paul Calluzzo

Paul Calluzzo

Queen's University - Smith School of Business

Evan Dudley

Queen's University - Smith School of Business

Date Written: March 1, 2022

Abstract

We study the effects of a derivatives supply shock on corporate hedging based on counterparty derivative provision in the Over-the-Counter market. We find that corporate hedging programs are fragile. When a firm’s counterparty in derivative transactions suffers losses on its loan portfolio, the firm is more likely to lose access to this type of hedging. Affected firms respond by increasing their savings rate and preserving access to corporate lines of credit. These results are not present in a counterfactual experiment that involves capital shocks to the firm’s lenders who do not act as counterparties in over-the-counter derivative transactions.

Keywords: corporate hedging; risk management; derivative supply shock; financial crisis; OTC markets

JEL Classification: G21, G32

Suggested Citation

Calluzzo, Paul and Dudley, Evan, Corporate hedging fragility in the over-the-counter market (March 1, 2022). Available at SSRN: https://ssrn.com/abstract=3176156 or http://dx.doi.org/10.2139/ssrn.3176156

Paul Calluzzo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

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