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Hedging Operating Exposure Financially: The Effect of the Abandonment Option

Author

Listed:
  • Aabo, T.

Abstract

The degree to which an operating exposure should be hedged financially is affected by the introduction of a valuable abandonment option. The introduction of an abandonment option does not lead to a simple reduction of the need for a financial hedging. Rather the reduction of the need for financial hedging is shown to depend upon the relative magnitudes of 1) the cash flow uncertainties stemming from the direct and indirect cash flow effects from the development in exchange rates, 2) the cash flow uncertainties stemming from other items, and 3) the cost of exercising the abandonment option.

Suggested Citation

  • Aabo, T., 1998. "Hedging Operating Exposure Financially: The Effect of the Abandonment Option," Papers 98-5, Melbourne - Centre in Finance.
    • Handle: RePEc:fth:melrfi:98-5
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    Cited by:

    1. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.

    More about this item

    Keywords

    EXCHANGE RATE ; FINANCIAL MARKET;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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