Question

How may hedging increase value of a company through: Reducing agency costs; Reducing costs of financial distress; Tax optimization.

Answer 1

Answer:

Hedging increases value of a company through:

Reducing costs of financial distress.

Explanation:

Hedging is a risk reduction and management strategy, which a company employs to offset or reduce its losses in investments by assuming opposite positions in some related assets. The reduction in risks through hedging results in some reduction in the profitability of the investments, based on the basic understanding of risk-return trade-off.  Hedging strategies are done with derivatives, such as options and futures contracts.