Hedging, Leverage, and Primitive Risk

JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995

Posted: 23 Aug 1998

See all articles by Walter Dolde

Walter Dolde

University of Connecticut - Department of Finance

Abstract

Only in the last decade have nonfinancial firms begun to develop effective procedures for hedging the increased volatility of exchange rates, interest rates, and commodity prices. We report the first empirical evidence on hedging, leverage, and other firm characteristics from the 1990s, subsequent to the rapid growth of hedging. We unravel a previous puzzle in corporate finance, showing a significant positive relationship between hedging and leverage when we control for primitive risk exposures. Hedging and leverage policies are interrelated because both affect expected costs of financial distress and agency costs. We construct a direct measure of the expected costs of financial distress and find some evidence that hedging mitigates the effects of leverage.

JEL Classification: G30

Suggested Citation

Dolde, Walter, Hedging, Leverage, and Primitive Risk. JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6660

Walter Dolde (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
One Univesity Place
Stamford, CT 06901-2315
United States
203-301-0806 (Phone)

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