| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 5069329 | Finance Research Letters | 2017 | 5 Pages |
â¢Corporate hedging decision is modeled in a multi-period framework.â¢Lower and upper bound of optimal hedge ratio are derived.â¢Optimal hedge ratio is determined as a function of funding liquidity costs and the expected value of the forward hedge.â¢Forward market bias has a significant effect on corporate hedging.
The paper1 investigates corporate hedging behavior in a theoretical model focusing on two important influencing factors: liquidity constraints affecting the funding opportunity of the firm and the extent of available hedging position, and speculative motive of risk management based on a bias of forward market. The optimal hedge ratio is analyzed in the function of three determining factors of the corporate utility function: the risk aversion ratio of the firm, the expected value of the hedge position, and the financing costs due to the hedging itself. The large empirical evidence of corporate over- and underhedge can be better understood in the presented framework.
