End-user hedging: FMC’s natural gas hedges show benefits of OTC trading

Using a case study of Philadelphia-based FMC Corporation’s natural gas hedges, Ivilina Popova of Texas State University and Betty Simkins of Oklahoma State University show that over-the-counter derivatives are more efficient and effective compared with exchange-traded alternatives, and can reduce liquidity requirements

Recent research has shown that using derivatives to manage risk can reduce both total risk and systematic risk

Over the past 30-plus years, innovations in the over-the-counter derivatives markets have fundamentally advanced the risk management practices of non-financial firms in value-adding ways. These advances have helped firms to expand globally and be internationally competitive. In the wake of the financial crisis, regulatory proposals were made in the European Union and the US that could potentially limit the ability of non-financial firms to effectively use the OTC markets in managing risk