The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging

Authors

  • John D. Knopf,

  • Jouahn Nam,

  • John H. Thornton Jr.

    Search for more papers by this author
    • John D. Knopf is an Associate Professor at Seton Hall University. Jouahn Nam is an Assistant Professor at Pace University. John H. Thornton Jr. is an Assistant Professor at Kent State University. We thank an anonymous referee, Chris Bollinger, Paul Bolster, Peter Dadalt, Gerald Gay, Jayant Kale, Tom Noe, Eli Ofek, Steve Smith, the participants at the Georgia State University Finance Workshop, the participants at the Kent State University Research Seminar, the participants at the 1997 Eastern Finance Association Annual Meeting, and the participants at the 1997 Financial Management Association Annual Meeting for helpful comments.

ABSTRACT

We use estimates of the Black—Scholes sensitivity of managers' stock option portfolios to stock return volatility and the sensitivity of managers' stock and stock option portfolios to stock price to test the relationship between managers' risk preferences and hedging activities. We find that as the sensitivity of managers' stock and stock option portfolios to stock price increases, firms tend to hedge more. However, as the sensitivity of managers' stock option portfolios to stock return volatility increases, firms tend to hedge less.

Ancillary