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in terms of expected utility. Therefore, the firm has the incentive to hedge more. Second, a
higher volatility increases the expected amount of collateral needed, which leads to higher
net financing costs. Korn [2003] shows that the first effect dominates, and the hedge ratio
increases with higher volatility. See below a graphical demonstration of the trade-off
effects.
The evolution of hedge ratios in Korn’s [2003] model subject to changing various
parameters
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