How do Firms Hedge in Financial Distress?

Evan Dudley · Niclas Andrén · Håkan Jankensgård

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Risk Management in Financial Firms Corporate Finance and Governance Market Dynamics and Volatility

Abstract

Abstract We examine how firms hedge in financial distress. Using hand‐collected data from oil and gas producers, we find that these firms hedge oil prices during periods of financial distress. Derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three‐way (3W) collar strategy that combines buying put options and selling put and call options with differing strike prices. Because liquidity demand varies with the degree of financial distress, the 3W collar strategy preserves incentives for future growth.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1985The Determinants of Firms' Hedging Policies 2008Forecasting Default with the Merton Distance to Default Model 1996RETHINKING RISK MANAGEMENT 1993Risk Management: Coordinating Corporate Investment and Financing Policies 2006Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers 1991Forward Contracts and Firm Value: Investment Incentive and Contracting Effects

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