Corporate Risk Management and Speculative Motives

34 Pages Posted: 6 Mar 2002

See all articles by Zeigham Khokher

Zeigham Khokher

Tulane University

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: May 15, 2007

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

Suggested Citation

Khokher, Zeigham and Brown, Gregory W., Corporate Risk Management and Speculative Motives (May 15, 2007). Available at SSRN: https://ssrn.com/abstract=302414 or http://dx.doi.org/10.2139/ssrn.302414

Zeigham Khokher

Tulane University ( email )

7 McAlister Drive
Tulane University
NEW ORLEANS, LA 70118
United States
504-865-5067 (Phone)

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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