Operational Hedging vs. Financial Hedging: Evidence from Oil Producers

Stuart School of Business research presentation by: Associate Professor of Finance Yiwei Fang, Associate Professor of Finance Sang Baum Kang, and Assistant Professor of Finance You Lu (Stuart Ph.D. MSC ’20), Soochow University, China

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Operational Hedging vs. Financial Hedging: Evidence from Oil Producers

  • Associate Professor of Finance Yiwei Fang
  • Associate Professor of Finance Sang Baum Kang
  • You Lu (Stuart Ph.D. MSC ’20), Assistant Professor of Finance, Soochow University, China

Abstract:

This paper investigates the effects of operational hedging on firm value and commodity price risks. It explores a novel type of operational hedging—the natural operational hedging positions between the upstream crude oil producers and the downstream oil consumers. Using hand-collected data of 267 unique oil-producing firms, we find that consistent with hedging theory, operational hedging adds to the firm value measured by Tobin’s Q. Operational hedging is sufficiently effective in reducing firms’ exposure to oil price risk. We also find that operational hedging is a substitute for financial hedging.

 

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