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Date of Award
Doctor of Philosophy (PhD)
Isenberg School of Management
Thomas R. Schneeweis
This dissertation focuses on option-based risk management from corporate finance and investment perspectives.
The first chapter focuses on a corporate finance issue: understanding dynamic hedge ratios of gold mining firms. An understanding of the hedging activities of a firm is critical to developing a thorough picture of risk exposures. In this paper we provide an alternative explanation for the dynamic nature of hedge ratios of mining firms. While the extant hedging literature is voluminous, it often errs by directly or indirectly assuming that Selective Hedging (in which managers base their hedging decisions on their expectations of future prices) is the source of dynamic hedge ratios. In contrast, we argue that the dynamic hedging activities of gold producers may not be indicative of Selective Hedging, but rather a form of hedging driven by the firm's cost structure whereby the managers attempt to dynamically replicate a protective put position on the value of their future production to ensure a minimum threshold profit margin (similar to Portfolio Insurance). Informational asymmetries relating to the details of the firms cost structure may allow such managers to add value to the firm through their hedging activities. Thus, this model of hedging activity does not suffer from the persistence paradox of the Selective Hedging model.
The second essay focuses on option-based risk management from an investment perspective. The majority of the extant literature on option-based risk management focuses on equity investments. This is the first study to examine collar strategies on such a wide range of asset classes (17 exchange traded funds representing currencies, commodities, fixed income, and real estate). By considering the performance of collar strategies on a diverse set of assets, we draw insights into the unique characteristics of each asset class and the implications of these differences for risk management. We find significant differences across asset classes with respect to implied and realized volatility levels, volatility skew, transaction costs, liquidity and the effectiveness of collar strategies. This research provides valuable insight into the implementation of risk management strategies for retail and institutional investors in the rapidly evolving financial markets.
Szado, Edward, "Issues in Option-Based Risk Management" (2012). Doctoral Dissertations 1896 - February 2014. 428.