The Joint Hedging and Leverage Decision
نویسندگان
چکیده
The validating roles of hedging and leverage as value-adding corporate strategies arise from their beneficial manipulation of deadweight market impositions such as taxes and financial distress costs. These roles may even be symbiotic in their value-adding effects, but they are antithetic in their effects on company risk. This study’s modelling analysis indicates that hedging and leverage do interact for net benefit to company value. However there is no straightforward generalisation for the relative financial riskiness of an optimal joint hedging and leverage strategy in comparison to an unhedged optimal leverage strategy or an unhedged and unlevered strategy; the observed relative riskiness depends on the price level for production output and the company’s remaining production life. ∗ I am grateful for the guidance and patience of my dissertation supervisors, Philip Brown and Alex Szimayer. For advice and comments at various stages, many thanks to Bruce Grundy, Ning Gong, Kim Sawyer, Tom Smith, participants of the University of Melbourne’s Department of Finance seminar series, Ken Clements, Robert Durand, Ross Maller and participants of the University of New South Wales’ Department of Banking and Finance seminar series. Thanks also to UWA and FIRN for scholarship assistance during my doctoral study.
منابع مشابه
Hedging , Financing , and Investment Decisions : A Simultaneous Equations Framework
The purpose of this paper is to empirically investigate the interaction between hedging, financing, and investment decisions. This work is relevant in that theoretical predictions are not necessarily identical to those in the case where only two decisions are being made. We argue that the way in which hedging affects the firms’ financing and investing decisions differs for firms with different ...
متن کاملAgency Costs, Risk Management, and Capital Structure
The joint determination of capital structure and investment risk is examined. Optimal capital structure re ects both the tax advantages of debt less default costs (Modigliani-Miller), and the agency costs resulting from asset substitution (Jensen-Meckling). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for the range of envi...
متن کاملProduction Flexibility and Hedging
We extend the analysis on hedging with price and output uncertainty by endogenizing the output decision. Specifically, we consider the joint determination of output and hedging in the case of flexibility in production. We show that the risk-averse firm always maintains a short position in the futures market when the futures price is actuarially fair. Moreover, in the context of an example, we s...
متن کاملA model for hedging load and price risk in the Texas electricity market
Energy companies with commitments to meet customers’ daily electricity demands face the problem of hedging load and price risk. We propose a joint model for load and price dynamics, which is motivated by the goal of facilitating optimal hedging decisions, while also intuitively capturing the key features of the electricity market. Driven by three stochastic factors including the load process, o...
متن کاملDETERMINATION OF OPTIMAL HEDGING RULE USING FUZZY SET THEORY FOR MULTI-RESERVOIR OPERATION
To deal with severe drought when water supply is insufficient hedging rule, based on hedging rule curve, is proposed. In general, in discrete hedging rules, the rationing factors have changed from a zone to another zone at once. Accordingly, this paper is an attempt to improve the conventional hedging rule to control the changes of rationing factors. In this regard, the simulation model has emp...
متن کامل