Risk Appetite and Intermediation by Swap Dealers
55 Pages Posted: 28 Apr 2020
Date Written: April 1, 2020
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: Suggested Citation