Liquidity constrained exporters: Trade and futures hedging

Udo Broll and Jack E. Wahl

No 17/09, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

Abstract: We present a model of risk averse exporting firm subject to liquidity constraints. The firm enters an unbiased futuresmarket to hedge exchange rate risk and may not be able to satisfy high margin calls. Then the firm is forced toprematurely liquidate the futures position. We show that preferences and expectations become important for optimumexport and hedging decisions, i.e. separation theorem and full hedge theorem are violated. Furthermore, internationaltrade is affected, for only firms that have sufficient financial resources fully exploid gains from trade.

Keywords: liquidity constraint; trade; futures; hedging (search for similar items in EconPapers)
JEL-codes: D81 F23 F31 (search for similar items in EconPapers)
Date: 2009
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