Firms that could benefit from hedging are often too constrained to do it
Struggling firms can’t free up collateral for hedging because it is otherwise occupied – in a downturn, it is likely already being leveraged to keep a firm’s operations afloat
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Corporate finance veterans know that hedging, a strategy to offset potential losses, is essential to protecting their firms when facing a decline in cash flow or net worth.
Ironically, when firms are constrained and could most benefit from the insurance hedging provides, they also lack the resources to do so, according to research from Adriano Rampini, a finance professor at Duke University’s Fuqua School of Business.
[This article has been reproduced with permission from Duke University's Fuqua School of Business. This piece originally appeared on Duke Fuqua Insights]