The objective of this paper is to illustrate the life cycle of enterprise risk management using jet fuel price risk management within Southwest Airlines, Inc. Managing market price risk within a corporation appears to follow distinct life cycle periods as a firm moves from creation through a...

I study dynamic hedging for variable annuities under basis risk. Basis risk, which arises from the imperfect correlation between the underlying fund and the proxy asset used for hedging, has a highly negative impact on the hedging performance. I investigate whether the choice of a suitable...

If the creditworthiness of a counterparty is a derivative of a commodity price, there is the potential to have right- or wrong-way exposures in respective commodity transaction. Identifying them is important, because otherwise credit costs might be inadequately calculated and wrong incentives...

The growth in variable renewable energy (vRES) and the need for flexibility in power systems go hand in hand. We study how vRES and other factors, namely the price of substitute fuels, power price volatility, structural breaks, and seasonality impact the hedgeable power spreads (profit margins)...

Risk management is crucial for optimal portfolio management. One of the fastest growing areas in empirical finance is the expansion of financial deriva-tives. The purpose of this special issue on “Risk Management and Financial Deriva-tives” is to highlight some areas in which novel...

In this tutorial article, the strategies available to hedge market risks arising from different financing instruments are explained. Financial derivatives, whether futures or options have been widely applied in companies to mitigate or eliminate potential losses due to the uncertainty in...

We consider modeling errors in the hedging of a portfolio composed from BBB-rated bonds. By doing this, we open a new perspective to the debate on the relationship between corporate bonds and CDS spreads. We find that in ordinary times the added value of indexlinked credit derivatives is very...

This paper considers the multiperiod hedging decision in a framework of mean-reverting spot prices and unbiased futures markets. The task is to determine the optimal hedging path, i.e., the sequence of positions in futures contracts with the objective of minimizing the variance of an uncertain...

We propose a CVA model capturing the wrong way risk that is not product-specific and is suitable for large-scale computations. The model is based on a doubly stochastic default process with the default intensities proxied by credit spreads. Unlike in other models, the CVA is a function of the...

By means of a difference-in-differences approach (sigma-DID), we investigate the effect that hedging has on corporate risk. Examining the relation between hedging and the idiosyncratic variance of stock returns, we show that when new commodity derivatives are introduced in the Chicago Mercantile...