Interaction between Real Options and Financial Hedging: Fact or Fiction in Managerial Decision-Making

36 Pages Posted: 10 Dec 2003

See all articles by Tom Aabo

Tom Aabo

Aarhus University

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

Abstract

This empirical study of the exchange rate exposure management of Danish non-financial companies shows that decisions on whether or not to financially hedge an exchange rate exposure is affected by the possibility to react to changes in exchange rates by undertaking various forms of real actions (exercising real options) such as to enter new markets, change suppliers, shift production, among others. The results show that the combined interaction of a firm's size, exports, and foreign subsidiaries, as well as the firm's managerial emphasis on flexibility, are important to real options usage. These findings are important to firms in other countries with open economies.

Keywords: Exchange rate exposure management, Financial hedging, Operational hedging, Real options

JEL Classification: F23, F31, G15

Suggested Citation

Aabo, Tom and Simkins, Betty J., Interaction between Real Options and Financial Hedging: Fact or Fiction in Managerial Decision-Making. Review of Financial Economics, Vol. 14, Nos. 3-4, pp. 353-369, 2005. Available at SSRN: https://ssrn.com/abstract=474762 or http://dx.doi.org/10.2139/ssrn.474762

Tom Aabo

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus
Denmark
+45 87 16 48 39 (Phone)
+45 86 15 01 88 (Fax)

Betty J. Simkins (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

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