Liquidity Constrained Exporters : Trade and Futures Hedging

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