Hedging and Liquidity

Posted: 14 Dec 1999

See all articles by Antonio S. Mello

Antonio S. Mello

University of Wisconsin - Madison - Department of Finance, Investment and Banking

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Abstract

This paper develops a model for evaluating alternative hedging strategies for financially constrained firms. A key advantage of the model is the ability to capture the intertemporal effects of hedging on the firm's financial situation. We characterize the optimal hedge. A wide range of alternative hedging strategies can be specified and the model allows us to determine in each case if the hedging strategy raises or lowers firm value and by how much. We show that hedging firm value, hedging cash-flow from operations and hedging sales revenue are not optimal. The paper highlights the fact that every hedging strategy comes packaged with a borrowing strategy which requires careful consideration.

JEL Classification: G31, G32

Suggested Citation

Mello, Antonio S. and Parsons, John E., Hedging and Liquidity. Available at SSRN: https://ssrn.com/abstract=181992

Antonio S. Mello (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3423 (Phone)
608-265-4195 (Fax)

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~jparsons/

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