Why do companies deviate from maturity-range hedging?
Companies deviate from maturity-range hedging for three primary reasons:
(1) Inability to obtain the desired financing – Small businesses often cannot obtain funds in the maturities needed for hedging purposes. They have difficulty raising long-term capital and tend to weight their financing toward the available shorter-term trade credit and bank financing.
(2) Cost reduction (higher returns) – Some companies elect to use more short-term financing than required for hedging since it is lest costly when yield curves are normal. Other companies elect to use more long-term debt to avoid the costs of repeatedly renewing and renegotiating their financing.
(3) Risk reduction – Some companies elect to use more short-term financing than required for hedging since it gives them a high degree of flexibility in adding and subtracting debt from the balance sheet should their needs change. Other companies elect to use more long-term debt to lock in interest rates, improve their credit ratings, and avoid the danger of bankruptcy from having to repay debt on an ongoing basis.