Question

1. How may hedging increase value of a company through

1. Reducing agency costs
2. Reducing costs of financial distress
3. Tax optimization

                                                                                                                                                           

Answer 1

Hedging is very useful in many way for the corporation:

1. Reducing agency cost: Due to hedging, agents are not taking excessive risk and make sure the profit is coming by the right steps rather than taking excessive risk and it eventually increases the value of firm in longer run.

2. Reducing cost of financial distress: Sometime positions are exposed to the the market movement while using hedging technique one can reduce the cost of these financing distress which lead to increase in firm value .

3. Tax optimization: If earnings are stable due to hedge we can also project the tax liability clearly in that case one can optimize the taxation which can be further add value in company.