Dynamic Risk Management

Abstract:     
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time. Risk management drops substantially as airlines approach distress and recovers only slowly after airlines enter distress.

Number of Pages in PDF File: 62

Keywords: risk management, collateral, corporate finance, hedging, distress

JEL Classification: G32, G33, D22, D92, E22

working papers series