Hedging and liquidity

This article develops a model for evaluating alternative hedging strategies for financially constrained firms. A key advantage of the model is the abi lity to capture the intertemporal effects of hedging on the firm's financia l situation. We characterize the optimal hedge. A wide range of alternative hedging strategies can be specified and the model allows us to determine i n 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 an d hedging sales revenue are not optimal. The article highlights the fact th at every hedging strategy comes packaged with a burrowing strategy which re quires careful consideration.