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Managing financial risk with options on futures
1James J. Nance College of Business, Cleveland State University, OH, USA.
Summary
Healthcare financial managers can use options on futures contracts to manage financial risk in capitation payment systems. These financial instruments offer potential profits with limited losses, but require consideration of basis risk and trading costs.
Area of Science:
- Healthcare Finance
- Risk Management
- Financial Derivatives
Background:
- Managed care and capitation models are increasing financial risk for healthcare providers.
- Fixed-payment systems expose organizations to the risk of unexpectedly high healthcare utilization.
- Healthcare financial managers need effective tools to mitigate these financial exposures.
Purpose of the Study:
- To introduce options on futures contracts as a financial risk management tool for healthcare providers.
- To explain how these derivatives can protect organizations in capitation environments.
- To highlight key considerations before adopting these financial strategies.
Main Methods:
- Conceptual analysis of financial derivatives (options on futures).
- Discussion of their application in healthcare financial risk management.
- Identification of potential benefits and risks associated with their use.
Main Results:
- Options on futures contracts offer significant profit potential.
- These contracts provide a limited potential for financial loss.
- Basis risk and trading costs are critical factors to evaluate.
Conclusions:
- Options on futures present a viable strategy for healthcare financial managers to hedge against utilization risk in capitation.
- Careful consideration of market-specific factors like basis risk and transaction costs is essential for successful implementation.
- This approach can help stabilize financial outcomes in value-based care models.