Financial hedging and competitive strategy for value-maximizing firms under quantity competition
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Inspired by the growing use of financial hedging among competitive firms nowadays, we develop a game-theoretical model to investigate the problem of applying financial hedging to improve a firm’s competitive strategy. A distinctive setting of the model is that the firm value is a concave function of the firm profit, which is consistent with the empirical evidences in finance literature. After proving the unique existence of the Nash equilibrium, we examine the effects of financial hedging on the equilibrium and yield some novel results. In particular, our analysis suggests that in a competitive market, financial hedging is not just to protect a firm’s bottom line; perhaps more importantly, effective financial hedging schemes can help increase the firm value by boosting the firm’s production, raising the market share, and improving its profitability.
KeywordsFinancial hedging Risk management Games theory Nash equilibrium
The authors would like to thank the Editor and the anonymous referee for their insightful comments. We also gratefully acknowledge support from the National Natural Science Foundation of China (NSFC Nos. 71601159, 71673275).
Compliance with ethical standards
The authors have read the section on “ethical responsibilities of authors” and decided that we have complied fully with the requirements of the COPE. We also confirm that (1) The authors are full-time employees of their respective academic institutions. They received on other research funding from internal or external funding bodies for this research. (2) This research involves no human participants or the use of live animals.
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