Liquidity constraints and the hedging role of futures spreads

Kit Pong Wong

Journal of Futures Markets, 2004, vol. 24, issue 10, 909-921

Abstract: This paper examines the behavior of the competitive firm under price uncertainty in general and the hedging role of futures spreads in particular. The firm has access to a commodity futures market where unbiased nearby and distant futures contracts are transacted. A liquidity constraint is imposed on the firm such that the firm is forced to prematurely close its distant futures position whenever the net interim loss due to its nearby and distant futures positions exceeds a threshold level. This paper shows that the liquidity constrained firm optimally opts for a long nearby futures position and a short distant futures position should the firm be prudent, thereby rendering the optimality of using futures spreads for hedging purposes. This paper further shows that the firm's production decision is adversely affected by the presence of the liquidity constraint. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:909–921, 2004

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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:10:p:909-921

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 ().