FinanceProfessor

Episode 56

Why corporations hedge (the theory)

Jim Mahar published on

Shareholders' payoff looks like that of a call holder.  Calls appreciate with volatility.  So why do firms hedge?  There are many reasons (at least theoretically):  It makes contracting easier, it makes it easier to hire people, lowers the cost of debt, lowers expected bankruptcy costs, and lowers expected taxes.  

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