Individual loans contain a bundle of risks including credit risk and interest rate risk. This paper focuses on the general issue of banks' management of these various risks in a model with costly loan monitoring and convex taxes. The results suggest that if the hedge is not subject to basis...

Most existing hedging theories are derived under strong, idealistic assumptions on both the underlying security price dynamics and the trading environments. Practical concerns such as contract availability, transaction cost, and uncertainty regarding the security price dynamics impose severe...

Most existing hedging approaches are based on neutralizing risk exposures defined under a pre-specified model. This paper proposes a new, simple, and robust hedging approach based on the affinity of the derivative contracts. As a result, the strategy does not depend on assumptions on the...

Hedging creates value only when the policy is near optimal but can be harmful otherwise. This paper takes the US airline industry as an example and derives the optimal fuel cost hedging ratio as a function of firm-specific revenue and cost sensitivities, as well as the relative composition of...