Hedging, Speculation and Shareholder Value
Posted: 4 Aug 2005 Last revised: 5 Aug 2008
We document that firms in the gold mining industry have consistently realized economically significant cash flow gains from their derivatives transactions. We conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms' systematic risk. This finding contradicts a central assumption in the risk management literature, that derivatives transactions have zero net present value, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. Although we find considerable evidence of selective hedging in our sample, the cash flow gains from selective hedging appear to be small at best.
Keywords: Corporate risk management, hedging, speculation, risk premium, hedging benefits
JEL Classification: G11, G14, G32, G39
Suggested Citation: Suggested Citation