Issue 3, 2015

Okulov V. L. Selective Hedging of Corporate Risks.

The choice «to hedge or not to hedge» with which many companies are faced, if their value depends on uncertainty of output price, is addressed. The main goal is to propose a simple model of optimal hedge during selective hedging of corporate risks. The main assumption is that the big investors optimize their industry specific portfolios of shares according to the risk — return criterion minimizing, focusing on their own forecasts of the market situation. They try to minimize the ratio of foreseeable standard deviation to expected return of share. If the share return depends explicitly on some kind of risk factor (for example, commodity price), and the investors forecast the drop of risk factor or its high volatility, they can prefer the shares of those companies that hedge their risks. Additional demand will increase the number of hedging companies and the scale of hedge in industry. We also interviewed portfolio managers of large funds in Russia about the motives that guided them when investing in shares of companies exposed to price risks. It is possible, for example, to apply the theoretical framework to case study of hedging in the gold mining industry. Based on historical gold prices and under some simple assumptions about investors’ forecasting we have calculated the optimal hedge ratios and compared them with the observed coefficients of hedging in gold mining companies in 1990–1999. The main limitation is the representing of share return as a linear combination of market return and risk factor change. But the present study provides a starting-point for further analysis of selective hedging of corporate risks. The model can be a useful tool for company’s decision making under uncertainty of output prices. Keywords: risk, selective hedging, optimal hedge ratio, portfolio approach.

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