In the real world, hedging can increase the firm's expected cash flows by reducing expected taxes, bankruptcy costs, and agency costs.

Question

Quizplus · Accepted Answer

Hedging can reduce a firm's expected taxes by reducing the volatility of its earnings, which can reduce the impact of progressive tax rates. Hedging can also reduce expected bankruptcy costs by reducing the likelihood of financial distress, and can reduce agency costs by aligning the interests of managers and shareholders.

In the Real World, Hedging Can Increase the Firm's Expected