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Academic Essay Guaranteed Exam QuestionEssay Topic Discuss how corporate risk management tools can create shareholder value with reference to the extract given belowAccording to financial theory corporate hedging can increase shareholder value in the presences of capital market imperfections such as direct and indirect costs of financial distress costly external financing and taxes While various empirical challenges and limitations advise some caution with regard to the interpretation of existing evidence that results are however consistent with derivatives use being just on part of the broader financial strategy that considers the type and level of financial risks the availably of risk-management tools and the operating environment of the firm In particular recent evidence suggests that derivatives use is related to debt levels and maturity dividend policy holdings of liquid assets and the degree of operating hedging Moreover corporations do not just use financial derivatives but rely heavily on pass-through operational hedging and foreign currency debt to manage financial risk Corporate risk management is widely recognised as a tool that allows greater control of risk within capital markets However it has been widely disputed among academics all over the world for many years Fundamentally hedging allows imperfections in capital markets to create a rationale for lowering the volatility of earnings through hedging Jin T and Jorion P 2006 The journal article Corporate Risk Management Costs and benefits Ali F and Carl L 2002 was valuable to my own learning of the core issues that surround hedging and also in my study that helped me to answer the fundamental question of hedging to hedge or not to hedge From my own research I now hold a viewpoint that hedging most certainly does add value to a firm However there are only a couple of good reasons why a firms should hedge One is to cut its tax bills which is more likely to happen only if the firms profits tend to yo-yo between higher and lower tax bands
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