How should firms selectively hedge? Resolving the selective hedging puzzle

Rafal Wojakowski

Journal of Corporate Finance, 2012, vol. 18, issue 3, 560-569

Abstract: We provide a model of intertemporal hedging consistent with selective hedging, a widespread practice corroborated by recent empirical studies. We argue that the optimal hedge is a value hedge involving total current value of future earnings. More importantly, the hedging decision is independent of risk preferences of the firm or agent. Our closed-form solutions imply several implications for the risk management policy in a firm. In order to lock in profits a hedge increase is recommended in favorable states of nature, while in bad states the firm should decrease the hedge and wait. Our main new empirical implication is that selective hedging should be more prevalent in industries where managers are exposed to convex cash flow structures and are more likely to “value hedge” their exposures.

Keywords: Selective hedging; Value hedge; Financial forwards and futures; Long-term exposure (search for similar items in EconPapers)
JEL-codes: C11 C61 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:3:p:560-569

DOI: 10.1016/j.jcorpfin.2012.02.003

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