Rights statement: The final, definitive version of this article has been published in the Journal of Corporate Finance 18 (3) 2012, © ELSEVIER.
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - How should firms selectively hedge? Resolving the selective hedging puzzle.
AU - Wojakowski, Rafal
N1 - The final, definitive version of this article has been published in the Journal of Corporate Finance 18 (3) 2012, © ELSEVIER.
PY - 2012/6
Y1 - 2012/6
N2 - 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.
AB - 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.
KW - Selective hedging
KW - Value hedge
KW - Financial forwards and futures
KW - Long-term exposure
U2 - 10.1016/j.jcorpfin.2012.02.003
DO - 10.1016/j.jcorpfin.2012.02.003
M3 - Journal article
VL - 18
SP - 560
EP - 569
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
SN - 0929-1199
IS - 3
ER -