TITLE:
A Review of Corporate Hedging Models and Their Relevance in Corporate Finance
AUTHORS:
Pankaj Gupta
KEYWORDS:
Corporate Hedging Models, Capital Structure, Investment Decision
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.2,
February
3,
2017
ABSTRACT: In this paper, a review of
theoretical literature of models providing rational of corporate hedging is done and also addresses the corporate finance issues such as financing and investment. As per definition, hedging is either
an insurance contract or an
activity reducing the correlation between value and random variable linked with the derivative purchase. It is found that,
when considering the modern finance
theory after relaxing the assumptions made by Modigliani & Miller,
the corporate hedging reduces several costs such as agency cost, distress cost
and cost of debt. Also, hedging models are explained reducing the adverse
selection problem. An integrated approach based models are also present in the
review.