Liquidity Constrained Exporters: Trade and Futures Hedging
Dresden Discussion Paper in Economics No. 17/09
16 Pages Posted: 9 Feb 2010 Last revised: 17 Mar 2010
Date Written: February 9, 2010
Abstract
We present a model of risk averse exporting firm subject to liquidity constraints. The firm enters an unbiased futures market to hedge exchange rate risk and may not be able to satisfy high margin calls. Then the firm is forced to prematurely liquidate the futures position. We show that preferences and expectations become important for optimum export and hedging decisions, i.e. separation theorem and full hedge theorem are violated. Furthermore, international trade is affected, for only firms that have sufficient financial resources fully exploid gains from trade.
Keywords: Liquidity constraint, trade, futures, hedging
JEL Classification: D81, F23, F31
Suggested Citation: Suggested Citation
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