Home > Research > Publications & Outputs > How should firms selectively hedge? Resolving t...

Electronic data

  • How should firms selectively hedge? (PREPRINT)

    Rights statement: The final, definitive version of this article has been published in the Journal of Corporate Finance 18 (3) 2012, © ELSEVIER.

    Submitted manuscript, 240 KB, PDF document

Links

Text available via DOI:

View graph of relations

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

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>06/2012
<mark>Journal</mark>Journal of Corporate Finance
Issue number3
Volume18
Number of pages10
Pages (from-to)560-569
Publication statusPublished
Early online date27/02/12
Original languageEnglish

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.

Bibliographic note

The final, definitive version of this article has been published in the Journal of Corporate Finance 18 (3) 2012, © ELSEVIER.