Corporate Risk Management and Speculative Motives

Abstract

We develop a simple framework for analyzing corporate risk management decisions when managers have a directional prediction on future price levels. The optimal hedging strategy with "a view" retains a partial exposure and requires rebalancing. This can help explain the active trading behaviour of some managers, the large cross sectional and time series variation in hedge ratios and the prevalence of partial hedging. In addition to providing a simple account of the stylized facts, the model generates new testable implications for corporate hedging policy. We parameterize and estimate the model using foreign exchange hedging data from a large multinational corporation and find support for the model's predictions.

Keywords: Risk Management, Speculation, Hedging

JEL Classification: G30