Froot et al. [J. Finance 48 (1993) 1629] develop a framework in which a firm trades derivatives on the financial markets to coordinate its investing and financing decisions. This work specifies this framework by assuming that the firm faces a risk of going bankrupt. By deriving an approximated analytical solution, some properties of the optimal hedging strategy and the effects of hedging on a firm's investing and financing behaviour are developed and discussed. Numerical simulations of the nonclosed-form optimal solution are also obtained to validate the approximation.

Determinants of Hedging and Its Effects on Investment and Debt

SPANO', MARCELLO
2004-01-01

Abstract

Froot et al. [J. Finance 48 (1993) 1629] develop a framework in which a firm trades derivatives on the financial markets to coordinate its investing and financing decisions. This work specifies this framework by assuming that the firm faces a risk of going bankrupt. By deriving an approximated analytical solution, some properties of the optimal hedging strategy and the effects of hedging on a firm's investing and financing behaviour are developed and discussed. Numerical simulations of the nonclosed-form optimal solution are also obtained to validate the approximation.
2004
hedging, investment, debt, bankruptcy costs, internal funds
Spano', Marcello
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11383/4660
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