Risk Management with Supply Contracts

Finance

Further details

Purchase obligations are forward contracts with suppliers. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Purchase obligations are used more broadly than traded commodity derivatives, even when firms approach financial distress. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Further, firms that experience a negative shock to bank-provided liquidity increase their use of purchase obligations. This paper shows that firms use purchase obligations to manage risk, and that the availability of financial hedging options is an important determinant of hedging through purchase obligations.

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