The determinates of selective exchange risk management.pptVIP

The Determinates of Selective Exchange Risk Management – Evidence From German Non-Finance Corporations-- by Martin GlaumJustus-Liebig-Universit?t Giessen The Changing View of Hedging I. Traditionally, the discussions of corporate risk management have been based on the assumption that the basic aim of derivative-based hedging programs is to reduce, or even minimize, the firm’s exposure to financial risks. Traditional text books on risk management tend to describe the various instruments and techniques that enable companies to achieve the above goal. The Changing View of Hedging II. Late 1970s, economists pointed to the efficiency of financial markets and to equilibrium relationships in international financial market. Argue that firms could not add value by hedging foreign exchange or other financial exposures. Therefore, hedging is unnecessary, even value-reducing. In a classic Modigliani and Miller (MM) world with perfect capital markets, risk management should be irrelevant. When there are no information asymmetries, taxes, or transaction costs, hedging financial risk should not add value to the firm because shareholders can undo any risk management activities implemented by the firm at the same cost. The Changing View of Hedging III. Middle of 1980s, corporate hedging of financial risks has the potential to increase firm value – due to market imperfections. A number of studies have attempted to identify the most important determinants of actual corporate hedging behaviour. Findings: Large companies are more likely to conduct hedge Other explanations are mixed The Changing View of Hedging Survey studies suggest that companies follow different risk management practices. Do not hedge at all Try to hedge all positions “Selective” hedging strategy (majority) Determinants of Corporate Hedging (Theories) a. Costs of financial distress (Bankruptcy cost) b. Funding gr