Abstract
The paper1 investigates corporate hedging behavior in a theoretical model focusing on two important influencing factors: liquidity constraints affecting the funding opportunity of the firm and the extent of available hedging position, and speculative motive of risk management based on a bias of forward market. The optimal hedge ratio is analyzed in the function of three determining factors of the corporate utility function: the risk aversion ratio of the firm, the expected value of the hedge position, and the financing costs due to the hedging itself. The large empirical evidence of corporate over- and underhedge can be better understood in the presented framework.
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