Optimal Liquidity management and Hedging in the presence of a non-predictable investment opportunity

Villeneuve, Stéphane; Warin, Xavier

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

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Type

Article accepté pour publication ou publié

Date

2014

Nom de la revue

Mathematics and Financial Economics

Volume

Numéro

Éditeur

Springer

Pages

193-227

Résumé (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.