Pure risk avoidance hedging

Standard finance models of risk management hedging.

Try to reduce “absolute” risk. For example, a firm might reduce expected costs of financial distress (avoid bankruptcy), or reduce variability in cash flows. The minimum variance hedge is a classic example of this.

These are for firms that are risk adverse - meaning they have a concave untility function - or at least act as if they are risk adverse.


References

@culp1995a