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Optimal hedging strategies and interactions between firms

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  • Loss, Frederic

Abstract

This paper studies corporate risk management in a context with financial constraints and imperfect competition on the product market. We show that the interactions between firms heavily affect their hedging demand. As a general rule, the firms’ hedging demand decreases with the correlation between firms’ internal funds and investment opportunities. We show that when the hedging demand of a firm is high in the case where investments are strategic substitutes, its hedging demand is low in the case where investments are strategic complements, and vice versa. Finally, we also propose another interpretation of our model in terms of technical choice.

Suggested Citation

  • Loss, Frederic, 2002. "Optimal hedging strategies and interactions between firms," LSE Research Online Documents on Economics 24903, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24903
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    File URL: http://eprints.lse.ac.uk/24903/
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    References listed on IDEAS

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    1. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    3. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    4. Martin F. Grace & Michael J. Rebello, 1993. "Financing and the Demand for Corporate Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(2), pages 147-171, December.
    5. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    6. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
    7. Bruno Jullien & Georges Dionne & Bernard Caillaud, 2000. "Corporate insurance with optimal financial contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 77-105.
    8. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-1354, September.
    9. Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-296, April.
    10. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-284, March.
    11. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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    Cited by:

    1. Léautier, Thomas-Olivier & Rochet, Jean-Charles, 2014. "On the strategic value of risk management," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 153-169.
    2. Hoang, Daniel & Ruckes, Martin, 2014. "The effects of disclosure policy on risk management incentives and market entry," Working Paper Series in Economics 65, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    3. Liu, Tingjun & Parlour, Christine A., 2009. "Hedging and competition," Journal of Financial Economics, Elsevier, vol. 94(3), pages 492-507, December.
    4. repec:mje:mjejnl:v:12:y:2016:i:3:p:39-54 is not listed on IDEAS

    More about this item

    Keywords

    Hedging; Interactions between firms; Credit rationing;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • D29 - Microeconomics - - Production and Organizations - - - Other
    • G2 - Financial Economics - - Financial Institutions and Services

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