Neutral and Non Neutral Shock Effects on Hedging, Investment and Debt
By trading derivatives on the financial markets, a firm can hedge against the fluctuations of its internal funds, in order to better coordinate investment and financing decisions. This work shows how optimal investment, debt and hedging strategy can be strongly dependent on the mechanism linking the firm's internal funds to its returns on investment. In particular, when internal funds react to a prospective price change (neutral shock), investment and debt would be positively related; when internal funds react to a non neutral productivity shock, investment and debt would be either negatively related (no hedging) or unrelated (hedging).
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