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UBC Theses and Dissertations
Hedging with derivatives and operational adjustments under asymmetric information Liu, Yinghu
Abstract
Firms can use financial derivatives to hedge risks and thereby decrease the probability of bankruptcy and increase total expected tax shields. Firms also can adjust their operational policies in response to fluctuations in prices, a strategy that is often referred to as "operational hedging". In this paper, I investigate the relationship between the optimal financial and operational hedging strategies for a firm, which are endogenously determined together with its capital structure. This allows me to examine how operational hedging affects debt capacity and total expected tax shields and to make quantitative predictions about the relationship between debt issues and hedging policies. I also model the effects of asymmetric information about firms' investment opportunities on their financing and hedging decisions. First, I examine the case in which both debt and hedging contracts are observable. Then, I study the case in which firms' hedging activities are not completely transparent. The models are tested using a data set compiled from the annual reports of North American gold mining companies. Supporting evidence is found for the key predictions of the model under asymmetric information.
Item Metadata
Title |
Hedging with derivatives and operational adjustments under asymmetric information
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Creator | |
Publisher |
University of British Columbia
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Date Issued |
1999
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Description |
Firms can use financial derivatives to hedge risks and thereby decrease the probability
of bankruptcy and increase total expected tax shields. Firms also can adjust
their operational policies in response to fluctuations in prices, a strategy that is
often referred to as "operational hedging". In this paper, I investigate the relationship
between the optimal financial and operational hedging strategies for a
firm, which are endogenously determined together with its capital structure. This
allows me to examine how operational hedging affects debt capacity and total expected
tax shields and to make quantitative predictions about the relationship
between debt issues and hedging policies. I also model the effects of asymmetric
information about firms' investment opportunities on their financing and hedging
decisions. First, I examine the case in which both debt and hedging contracts
are observable. Then, I study the case in which firms' hedging activities are not
completely transparent. The models are tested using a data set compiled from the
annual reports of North American gold mining companies. Supporting evidence is
found for the key predictions of the model under asymmetric information.
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Extent |
4078878 bytes
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Genre | |
Type | |
File Format |
application/pdf
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Language |
eng
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Date Available |
2009-07-21
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Provider |
Vancouver : University of British Columbia Library
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Rights |
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
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DOI |
10.14288/1.0089741
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URI | |
Degree | |
Program | |
Affiliation | |
Degree Grantor |
University of British Columbia
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Graduation Date |
2000-05
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Campus | |
Scholarly Level |
Graduate
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Aggregated Source Repository |
DSpace
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Item Media
Item Citations and Data
Rights
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.