The validating roles of hedging and leverage as value-adding corporate strategies arise from their beneficial manipulation of deadweight market impositions such as taxes and financial distress costs. These roles may even be symbiotic in their value-adding effects, but they are antithetic in their effects on company risk. This study's modelling analysis indicates that hedging and leverage do interact for net benefit to company value; for sensible base-case exogenous parameters, the optimal (value-maximising) joint hedging and leverage strategy increases company value by about 4.0% compared to the unhedged optimal leverage strategy, by about 1.3% compared to the unlevered optimal hedge strategy, and by about 4.0% compared to the company being unlevered and unhedged. Furthermore an optimal joint hedging and leverage strategy is less financially risky than an unhedged optimal leverage strategy or an unhedged and unlevered strategy, and is often less financially risky than an unlevered optimal hedge strategy. Interestingly, the optimal joint hedging and leverage strategy entails some risk-seeking hedge reversal in response to weak price outcomes for production output.
|Qualification||Doctor of Philosophy|
|Publication status||Unpublished - 2008|