Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Corporate risk management and speculative motives
Gregory W. Brown, Zeigham I. Khokher
Abstract
ABSTRACT
We develop a simple framework for analyzing corporate risk management decisions when managers have a directional prediction on future price levels. The optimal hedging strategy with “a view” retains a partial exposure and requires rebalancing. This can help explain the active trading behavior of some managers, the large cross-sectional and time series variation in hedge ratios and the prevalence of partial hedging. In addition to providing a simple account of the stylized facts, the model generates new testable implications for corporate hedging policy. We parameterize and estimate the model using foreign exchange hedging data from a large multinational corporation and find support for the model’s predictions.
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