Time to get mature: Collateral, flexibility and the hedging horizon decision

Hedging maturity, i.e., how far out in time hedging activities stretch, is an important yet under-investigated aspect of corporate risk management. In this article, we analyse firms’ hedging maturity decision and carry out a comprehensive empirical analysis. We develop three hypotheses to explain hedging maturity. The collateral hypothesis states that longer maturities are predicated on the availability of internal resources that serve as collateral in a hedging transaction. The matching hypothesis argues that firms match their hedging maturity with the maturity of their debt and investment portfolios. The flexibility hypothesis holds that the ability to change operations or investment strategies at low cost is conducive to shorter maturities. Using hand-collected data on derivative positions in the oil and gas industry, we find evidence consistent with all three hypotheses.