
Optimal Liquidity management and Hedging in the presence of a non-predictable investment opportunity
Villeneuve, Stéphane; Warin, Xavier (2014), Optimal Liquidity management and Hedging in the presence of a non-predictable investment opportunity, Mathematics and Financial Economics, 8, 2, p. 193-227. http://dx.doi.org/10.1007/s11579-013-0110-0
Type
Article accepté pour publication ou publiéDate
2014Journal name
Mathematics and Financial EconomicsVolume
8Number
2Publisher
Springer
Pages
193-227
Publication identifier
Metadata
Show full item recordAbstract (EN)
In this paper, we develop a dynamic model that captures the interaction between a firm’s cash reserves, the risk management policy and the profitability of a non-predictable irreversible investment opportunity. We consider a firm that has assets in place generating a stochastic cash-flow stream. The firm has a non-predictable growth opportunity to expand its operation size by paying a sunk cost. When the opportunity is available, the firm can finance it either by cash or by costly equity issuance. We provide an explicit characterization of the firm strategy in terms of investment, hedging, equity issuance and dividend distribution.Subjects / Keywords
Liquidity management; Singular control problem; One-dimensional free boundary problem; Maximum principleRelated items
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