This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between the minimum revenue guaranteed by hedging and investment expenditure. This result implies that hedging increases the likelihood that investments can be financed internally. I also find that firms tend to finance their investment expenditures externally rather than internally. If external capital is more costly than internal capital it would clearly be in a firm's interestto reduce its dependence on external capital. Consistent with this result, Ifind that the median firm that does not hedge finances 100% of its investment expenditures externally, while the median firm that hedges finances only 86% of investments externally. JEL classification codes: G32

This paper shows how the credit risk premium affects firms' optimal hedging strategies. The model predicts that if the credit risk premium is relatively small, firms use convex hedging strategies. If the credit risk premium is relatively large, firms use concave hedging strategies. Firms in between those two extremes use strategies that feature both convex and concave elements, e.g. collar strategies. Finally, firms that are unlevered, invest little and are exposed to few non-hedgeable risks are the most likely to use linear approximations of the optimal strategy. The model replicates essentially all observed hedging strategies in the gold mining industry.