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

See all articles by Udo Broll

Udo Broll

Dresden University of Technology - Faculty of Economics and Business Management

Jack E. Wahl

University of Dortmund - Department of Business

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

Broll, Udo and Wahl, Jack E., Liquidity Constrained Exporters: Trade and Futures Hedging (February 9, 2010). Dresden Discussion Paper in Economics No. 17/09, Available at SSRN: https://ssrn.com/abstract=1550035 or http://dx.doi.org/10.2139/ssrn.1550035

Udo Broll (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Jack E. Wahl

University of Dortmund - Department of Business ( email )

WiSo-Pavillon
Otto-Hahn-Str. 6a
Dortmund, 44227
Germany
+49 231 755 5300 (Phone)
+49 231 755 5231 (Fax)

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