értekezés - Budapesti Corvinus Egyetem

This term is assumed to be increasing at an increasing rate of using external funds, which
convexity makes the firm adverse to outside financing and creates an incentive to hedge.
The last term in the expression ( w i
w )
f − is what really matters for us now. This term
1 j1
stands for the expected strategic value of firm i’s equity and is defined as:
f
( w − w )
( wi
1
− w
j1
)
( w − w )
+
⎪⎧
β
if wi
1
− w
j1
≥ 0
+ −
i 1 j1
= ⎨
where β , β ≥ 0
−
⎪⎩ β
i1
j1
if wi
1
− w
j1
< 0
This function captures the notion that not only the absolute level of internal financial
resources is important for a firm’s future profits – as expressed by g ( w i 1
) –, but also the
relative level of financial reserves as compared to the competitors. For a given level of its
own reserves, a firm can expect higher future profits the lower its rival’s reserves are due
to their larger marginal costs of external finance. As Mello and Ruckes [2004] argue, the
shape of the function
β + < β − causes ()
( w i 1
w
j1
)
f ⋅ to be concave in ( w − w )
f − is a deciding factor in the firm’s hedging decision.
i1 j1
. This implies that each firm benefits less
when it gains financial ground on its rival than it is harmed when it looses ground. In this
case, creating volatility of relative internal resources by choosing a different size and
direction of risk exposure than that of the competitor does never increase a firm’s expected
profits.
β f ( ⋅)
+ −
If, however, profit increases with the divergence of internal capital, β > causing
to be convex in ( w − w )
i1 j1
, achieving an advantage with respect to internal funds becomes
attractive. Then, choosing to hedge in the opposite direction of the rival accomplishes, for
a given exchange rate exposure, maximum financial differentiation from the competitor.
As a result, firms prefer to hedge in different directions and choose different currency
denominations for their debt in order to overtake their competitor.
Hence, Mello and Ruckes [2004] conclude that if
β
+ ≤ β −
, complete hedging is the
+ −
unique equilibrium. If β > β , there are several pure-strategy equilibria depending on the
size of difference in internal financial resources between the two firms. For sufficiently
low divergence of internal capital, both firms hedge partially in opposite directions. There
is a range of divergence where partial or complete hedge both can be equilibrium solutions.
For sufficiently high divergence, both firms choose to completely hedge themselves from
183