Financial hedging and competitive strategy for value-maximizing firms under quantity competition

Jian Ni, Lap Keung Chu and Shoude Li ()
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Jian Ni: Southwestern University of Finance and Economics
Lap Keung Chu: University of Hong Kong
Shoude Li: Shanghai Jiao Tong University

Annals of Operations Research, 2018, vol. 264, issue 1, No 16, 407 pages

Abstract: Abstract Inspired by the growing use of financial hedging among competitive firms nowadays, we develop a game-theoretical model to investigate the problem of applying financial hedging to improve a firm’s competitive strategy. A distinctive setting of the model is that the firm value is a concave function of the firm profit, which is consistent with the empirical evidences in finance literature. After proving the unique existence of the Nash equilibrium, we examine the effects of financial hedging on the equilibrium and yield some novel results. In particular, our analysis suggests that in a competitive market, financial hedging is not just to protect a firm’s bottom line; perhaps more importantly, effective financial hedging schemes can help increase the firm value by boosting the firm’s production, raising the market share, and improving its profitability.

Keywords: Financial hedging; Risk management; Games theory; Nash equilibrium (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10479-017-2637-6

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