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

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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:
Journal 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 hedgingvalue hedgefinancial forwards and futureslong-term exposureaccounting and financefinanceeconomics and econometricsbusiness and international managementstrategy and managementhf commercediscipline-based research ??
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Deposited On:
23 Jan 2012 10:22
Last Modified:
12 Feb 2024 00:26