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Optimal Liquidity Management and Hedging in the presence of a non predictable investment opportunity

  • Villeneuve, Stéphane
  • Warin, Xavier
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    In this paper, we develop a dynamic model that captures the interaction between the cash reserves, the risk management policy and the profitability of a non-predictable irreversible investment opportunity. We consider a firm that has assets in place generating a stochastic cash- ow stream. The firm has a non-predictable growth opportunity to expand its operation size by paying a sunk cost. When the opportunity is available, the firm can finance it either by cash or by costly equity issuance. We provide an explicit characterization of the firm strategy in terms of investment, hedging, equity issuance and dividend distribution.

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    Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-266.

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    Date of creation: 23 Jan 2012
    Date of revision:
    Publication status: Published in Mathematics and Financial Economics, vol.�8, n°2, mars 2014, p.�193-227.
    Handle: RePEc:tse:wpaper:25455
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    1. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    2. Bjarne Hø jgaard & Michael Taksar, 1999. "Controlling Risk Exposure and Dividends Payout Schemes:Insurance Company Example," Mathematical Finance, Wiley Blackwell, vol. 9(2), pages 153-182.
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