Topic: Corporate Hedging, Contract Rights, and Basis Risk

Speaker: Yuri Tserlukevich, Associate Professor, Arizona State University

Time: 10:00am-11:30am, Wednesday, May 7

Location: 4-101

Abstract:

A hedging contract can be terminated by a counterparty following a firm’s event of default, such as a credit downgrade, covenant violation, or bankruptcy. This right is often exercised. Our model shows that although the termination right reduces hedging costs, it can reduce firm value because the counterparty exercising it does not consider the externality imposed on the firm. Consequently, firms hedge less, especially when facing high bankruptcy costs, and are more likely to enter liquidation. Using detailed hedging data, we confirm the model’s predictions and provide an explanation for low hedging during financial distress.

Speaker Biography:

Yuri Tserlukevich is a financial economist at Arizona State University. Yuri's research interests are in dynamic models of firm behaviour, real options, asset pricing implications of investment options, capital structure, debt structure, employee compensation. He also taught and conducted research at Hong Kong University of Science and Technology, Bocconi University in Milan, New Economic School in Moscow, and WU university in Vienna. Beginning 2014 he is a member of the Advisory Board of the National Bank of the Republic of Belarus. Yuri Tserlukevich obtained his Ph.D. from University of California at Berkeley.