The next Brown Bag Seminar is scheduled for Tuesday, May 30th, 2017, 12.00-13.00 in seminar room TC.5.04.

Our speaker will be Yuri Tserlukevich (Arizona State University).

Titel: "Embracing Risk: Hedging Policy for Firms with Real Options" (with Ilona Babenko)

Abstract - This study analyzes the dynamic risk management policy of a firm that faces a tradeoff between minimizing the costs of financial distress and maximizing financing for investment. Costly external financing of investment discourages hedging because of the option to abandon investment at low profitability and the option to expand investment at high profitability. Our theory generates results consistent with actual policies, without relying on the costs of risk management. First, we show that firms with safe assets and fewer growth options can choose to hedge more aggressively than firms with risky assets. Second, firms prefer to hedge systematic rather than firm-specific risk, even when hedging technologies for both types of risk are available. Third, risk is optimal at lower net worth. Therefore, more constrained firms may appear to hedge less aggressively.