Lancaster EPrints

How should firms selectively hedge? Resolving the selective hedging puzzle.

Wojakowski, Rafal (2012) How should firms selectively hedge? Resolving the selective hedging puzzle. Journal of Corporate Finance, 18 (3). pp. 560-569. ISSN 0929-1199

[img]
Preview
PDF (How should firms selectively hedge? (PREPRINT)) - Draft Version
Download (239Kb) | Preview

    Abstract

    We provide a model of intertemporal hedging consistent with selective hedging, a widespread practice corroborated by recent empirical studies. We argue that the optimal hedge is a value hedge involving total current value of future earnings. More importantly, the hedging decision is independent of risk preferences of the firm or agent. Our closed-form solutions imply several implications for the risk management policy in a firm. In order to lock in profits a hedge increase is recommended in favorable states of nature, while in bad states the firm should decrease the hedge and wait. Our main new empirical implication is that selective hedging should be more prevalent in industries where managers are exposed to convex cash flow structures and are more likely to "value hedge" their exposures.

    Item Type: Article
    Journal or Publication Title: Journal of Corporate Finance
    Additional Information: The final, definitive version of this article has been published in the Journal of Corporate Finance 18 (3) 2012, © ELSEVIER.
    Uncontrolled Keywords: Selective hedging ; Value hedge ; Financial forwards and futures ; Long-term exposure
    Subjects: H Social Sciences > HF Commerce
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 52374
    Deposited By: ep_importer_pure
    Deposited On: 23 Jan 2012 10:22
    Refereed?: Yes
    Published?: Published
    Last Modified: 09 Apr 2014 23:02
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/52374

    Actions (login required)

    View Item