Abstract
This study tests if managerial preferences explain how firms hedge, i.e. how they choose between linear contracts and put options, and if they finance these hedging positions with cash-on-hand or by selling upside (call options). Using hand-collected data on derivative portfolios we characterize hedging strategies in the oil and gas industry. The predictions of the vega-theory of hedging instrument choice, according to which high-vega managers would avoid hedging strategies that cap upside potential, find some support in the data. Our second proxy for risk preferences, CEO age, increases the likelihood of being a derivative user but is not systematically related to hedging strategy. Our findings add to previous literature emphasizing non-linear exposures and financial status as determinants of hedging strategy.
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