Hedging, liquidity, and the competitive firm under price uncertainty

Kit Pong Wong

Journal of Futures Markets, 2004, vol. 24, issue 7, 697-706

Abstract: In this paper, the behavior of the competitive firm under price uncertainty when the firm has access to an intertemporally unbiased futures market is examined. Futures contracts are marked‐to‐market and thus require interim cash settlement of gains and losses. The firm is subject to a liquidity constraint in that it is forced to prematurely close its futures position on which the interim loss incurred exceeds a threshold level. It is shown that the liquidity constrained firm optimally opts for an under‐hedge should it be prudent. Furthermore, the prudent firm cuts down its optimal level of output in response to the presence of the liquidity constraint. As such, the liquidity risk created by the interim funding requirement of a futures hedge adversely affects the hedging and production decisions of the competitive firm under price uncertainty. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:697–706, 2004

Date: 2004
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:24:y:2004:i:7:p:697-706

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().