
Digital Library of the
European Council for Modelling and Simulation 
Title: 
Modelling Optimal Hedge Ratio In The
Presence Of Funding Risk 
Authors: 
Barbara Doemoetoer 
Published in: 
(2013).ECMS 2013 Proceedings edited
by: W. Rekdalsbakken, R. T. Bye, H. Zhang European Council for Modeling
and Simulation. doi:10.7148/2013 ISBN:
9780956494467 27^{th}
European Conference on Modelling and Simulation, Aalesund, Norway, May 27^{th} –
30^{th}, 2013 
Citation
format: 
Barbara Doemoetoer
(2013). Modelling Optimal Hedge Ratio In The
Presence Of Funding Risk, ECMS 2013 Proceedings
edited by: W. Rekdalsbakken, R. T. Bye, H. Zhang, European Council for Modeling
and Simulation. doi:10.7148/20130282 
DOI: 
http://dx.doi.org/10.7148/20130282 
Abstract: 
In
the broad literature of corporate risk management classic models of optimal
hedging assume a oneperiod hedging decision, and therefore no financing need
arises to maintain the hedge position. The multiperiod models are usually
based on the assumption of no liquidity constraints, and accordingly the
eventual financing need can always be met from the
market. As a consequence of the recent crisis even interbank deals need to be
collateralized, so the funding need of any financial transactions can be
disregarded. Another usual assumption of the financial models refers to a
zero expected value of the hedging position, which contradicts the also the
practice. This study investigates the optimal hedge position as a function of
3 factors that determine the corporate utility function: the risk aversion
ratio of the company, the expected value of the hedge position and the
financing costs deriving from the hedging itself. 
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