Dynamic Risk Management
61 Pages Posted: 1 Jul 2011 Last revised: 7 Sep 2013
Date Written: August 2013
Both financing and risk management involve promises to pay that need to be collateralized, resulting in a financing versus 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 show 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.
Keywords: Collateral, Risk management, Commodity prices, Financial distress, Airlines
JEL Classification: G32, D92, E22
Suggested Citation: Suggested Citation