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Cash Position, Credit Risk and Hedging
Author(s) -
Boyle Glenn W.
Publication year - 1992
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.1992.tb00019.x
Subject(s) - hedge , business , cash , currency , position (finance) , monetary economics , quality (philosophy) , economics , finance , ecology , biology , philosophy , epistemology
In choosing between forward and spot hedging, cash constrained and/or high credit risk firms are more likely to hedge foreign currency transactions forward than firms of greater quality. This arises because the cost of the levered component of a spot hedge is greater than the cost of the unlevered component and this premium increases with higher credit risk. For given cash and credit characteristics, importers are more (less) likely to hedge forward than exporters if transactions costs in the home security market are less (more) than the corresponding costs in the foreign security market.