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Liquidity constrained exporters: Trade and futures hedging

  • Broll, Udo
  • Wahl, Jack E.
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    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.

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    File URL: http://econstor.eu/bitstream/10419/39802/1/621110515.pdf
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    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 17/09.

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    Date of creation: 2009
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    Handle: RePEc:zbw:tuddps:1709
    Contact details of provider: Postal: 01062 Dresden
    Phone: ++49 351 463 2196
    Fax: ++49 351 463 7739
    Web page: http://www.tu-dresden.de/wiwi/
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    1. Broll, Udo & Wahl, Jack E. & Zilcha, Itzhak, 1995. "Indirect hedging of exchange rate risk," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 667-678, October.
    2. Meng, Rujing & Wong, Kit Pong, 2007. "Currency hedging for multinationals under liquidity constraints," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 417-431, December.
    3. Lien, Donald & Wong, Kit Pong, 2005. "Multinationals and futures hedging under liquidity constraints," Global Finance Journal, Elsevier, vol. 16(2), pages 210-220, December.
    4. Thomas Chaney, 2007. "Liquidity Constrained Exporters," 2007 Meeting Papers 979, Society for Economic Dynamics.
    5. Guenter Franke & Richard Stapleton & Marti Subrahmanyam, 2004. "Background risk and the demand for state-contingent claims," Economic Theory, Springer, vol. 23(2), pages 321-335, January.
    6. Manova, Kalina, 2008. "Credit constraints, equity market liberalizations and international trade," Journal of International Economics, Elsevier, vol. 76(1), pages 33-47, September.
    7. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    8. Harald Battermann & Udo Broll & Jack Wahl, 2008. "Utility functions of equivalent form and the effect of parameter changes on optimum decision making," Economic Theory, Springer, vol. 34(3), pages 401-414, March.
    9. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
    10. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
    11. Friberg, Richard & Wilander, Fredrik, 2008. "The currency denomination of exports -- A questionnaire study," Journal of International Economics, Elsevier, vol. 75(1), pages 54-69, May.
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