While the contract theory literature has examined the case where incentivized managers hedge against market risk by investing in the derivatives market, too little attention has been paid to the hedging of financial risks by the principal and how this influences incentive contracts. In this paper, we’re trying to fix that omission by examining how firm owner’s ability to control their global risk exposure impacts the design of the compensation contract they offer to a delegated expert.

A joint work with René Aïd and Nizar Touzi.