Embracing Risk: Hedging Policy for Firms with Real Options

63 Pages Posted: 16 Mar 2011 Last revised: 18 Aug 2021

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: August 17, 2019

Abstract

We build a dynamic risk management model of a financially constrained firm maximizing financing for its investment projects. Because of the option to abandon investment at low profitability and to expand investment at high profitability, hedging can be suboptimal. The model
predicts that firms will engage in more risk management when they have a
higher net worth and have easier access to external
financing. In contrast, financially constrained firms will hedge less
aggressively. Using detailed data for U.S. oil and gas producers
covering the period of unprecedented industry growth during 1999-2019, we
find support for model predictions.

Keywords: hedging, risk management, investment options, financing constraints, investment

Suggested Citation

Babenko, Ilona and Tserlukevich, Yuri, Embracing Risk: Hedging Policy for Firms with Real Options (August 17, 2019). Available at SSRN: https://ssrn.com/abstract=1785334 or http://dx.doi.org/10.2139/ssrn.1785334

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
409
Abstract Views
2,148
Rank
131,804
PlumX Metrics