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Corporate Risk Management: Integrating Liquidity, Hedging, and Operating Policies

35 Pages Posted: 20 Sep 2009 Last revised: 11 Mar 2014

Andrea Gamba

University of Warwick - Finance Group

Alexander J. Triantis

University of Maryland - Robert H. Smith School of Business

Date Written: March 8, 2013

Abstract

We analyze the value created by a dynamic integrated risk management strategy involving liquidity management, derivatives hedging and operating flexibility, in the presence of several frictions. We show that liquidity serves a critical and distinct role in risk management, justifying high levels of cash. We find that the marginal value associated with derivatives hedging is likely to be low, though we explain why some empirical studies find a higher value. We explore the complex interactions between operating flexibility and financial risk management, finding that substitution effects are non-monotonic, and are affected by operating leverage, the nature of operating flexibility, and the effectiveness of the hedging instrument.

Keywords: Risk Management, Hedging, Liquidity, Flexibility

JEL Classification: G32

Suggested Citation

Gamba, Andrea and Triantis, Alexander J., Corporate Risk Management: Integrating Liquidity, Hedging, and Operating Policies (March 8, 2013). Management Science, Forthcoming; Robert H. Smith School Research Paper No. RHS 06-106. Available at SSRN: https://ssrn.com/abstract=1475154

Andrea Gamba (Contact Author)

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Alexander J. Triantis

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-2246 (Phone)
301-314-9157 (Fax)

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