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Optimal hedge ratio in a biased forward market under liquidity constraints

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  • Dömötör, Barbara

Abstract

The paper1 investigates corporate hedging behavior in a theoretical model focusing on two important influencing factors: liquidity constraints affecting the funding opportunity of the firm and the extent of available hedging position, and speculative motive of risk management based on a bias of forward market. The optimal hedge ratio is analyzed in the function of three determining factors of the corporate utility function: the risk aversion ratio of the firm, the expected value of the hedge position, and the financing costs due to the hedging itself. The large empirical evidence of corporate over- and underhedge can be better understood in the presented framework.

Suggested Citation

  • Dömötör, Barbara, 2017. "Optimal hedge ratio in a biased forward market under liquidity constraints," Finance Research Letters, Elsevier, vol. 21(C), pages 259-263.
    • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:259-263
    DOI: 10.1016/j.frl.2016.11.009
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    References listed on IDEAS

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    Cited by:

    1. Csóka, Péter & Hevér, Judit, 2018. "Portfolio valuation under liquidity constraints with permanent price impact," Finance Research Letters, Elsevier, vol. 26(C), pages 235-241.

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    More about this item

    Keywords

    Corporate risk management; Optimal hedge ratio; Funding liquidity; Biased forward markets;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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