If default costs are significant,
A)corporate hedging would be justifiable because it will reduce the probability of default.
B)corporate hedging would be unjustifiable because it will increase the probability of default.
C)corporate hedging would be unjustifiable because it will increase the probability of default,resulting in a decreased credit rating and higher financing costs.
D)none of the options

Question

Quizplus · Accepted Answer

If default costs are significant, corporate hedging would be justifiable because it helps to reduce the probability of default. By reducing the risk of default, the company can avoid the costs associated with default such as legal fees, lost revenues, and reputational damage. By using hedging strategies, the firm can also improve its creditworthiness and access to cheaper financing options, leading to a lower cost of capital. Therefore, corporate hedging can be a wise strategy for firms facing significant default costs.

If Default Costs Are Significant