Optimal hedging strategies and interactions between firms

This paper studies corporate risk management in a context with financial constraints and imperfect competition on the product market. We show that the interactions between firms heavily affect their hedging demand. As a general rule, the firms’ hedging demand decreases with the correlation between firms’ internal funds and investment opportunities. We show that when the hedging demand of a firm is high in the case where investments are strategic substitutes, its hedging demand is low in the case where investments are strategic complements, and vice versa. Finally, we also propose another interpretation of our model in terms of technical choice.