I&R Articles - Article 2 slides

6 important questions on I&R Articles - Article 2 slides

What is the quiet life hypothesis?

Also this hypothesis states that managers' age can impact the hedging choices of firms.
  • The older the manager, the more hedging he or she will use
  • Aged managers who are close to retirement will prefer linear hedging among all hedging instruments

What is the risk incentive theory of hedging?

According to this theory, managers are naturally risk avers.
  • This means, if low return value is an option, the prefer a medium firm value over a high value.
  • Managers prefer completely hedge againt uncertainty with linear hedging strategies.
  • Risk-Neutral managers use:
    • Put cash
    • collar
    • linear
  • Risk-Averse managers use:
    • Linear
    • collar
    • put cash

What is meant by a collar strategy?

Long in put options and finance it by selling call.
  • Capping the upside potential at the same time compared to put cash.
  • More stable than put cash
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What are the main findings of this table and relate those to the theories:

Look to the statistical significance
negative and positive variables
the value of variable parameters

What is meant with operational hedging?


Is hedging the firm risk exposure by means of non-financial instruments, particularly through operational activitiesExamples:
  • relocating production facilities to get a better match of costs to revenues

What is natural hedging?

Example:
  • financing an operation in local currency

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