Risk Appetite and Intermediation by Swap Dealers

55 Pages Posted: 28 Apr 2020

See all articles by Scott Mixon

Scott Mixon

Commodity Futures Trading Commission

Esen Onur

Commodity Futures Trading Commission (CFTC)

Date Written: April 1, 2020

Abstract

We find that intermediary risk appetite plays an important role in the availability of dealer hedging services provided to real economy firms. We show that dealers intermediate the swap exposures of different clienteles and hedge some residual risk in the futures market. Using novel data on WTI crude oil swaps and futures positions of individual dealers, we present evidence that dealers hedge
bespoke contracts with standard, liquid instruments and face basis risk. We conclude that the equilibrium quantity of basis risk taken, and therefore the amount of inter-mediation service available at a given price, is correlated with risk appetite.

Keywords: Dealers, Hedging, Risk Appetite, Inter-mediation Service

JEL Classification: G11, G13, G21, G32

Suggested Citation

Mixon, Scott and Onur, Esen, Risk Appetite and Intermediation by Swap Dealers (April 1, 2020). Available at SSRN: https://ssrn.com/abstract=3566003 or http://dx.doi.org/10.2139/ssrn.3566003

Scott Mixon

Commodity Futures Trading Commission ( email )

1155 21st Street NW
Washington, DC 20581
United States

Esen Onur (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

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