Consider a producer exposed to output price risk. If price risk can be managed with futures contracts, a full hedge ensures that the producer's nancial position at the hedging horizon is almost risk-free. However, this is only true if the producing rm can always accommodate the liquidity needs that may arise from the marking to market of the futures position. Depending on the development of the futures price over time, marking to market may lead to interim cash in ows and/or cash out ows prior to the hedging horizon. Suppose that the producing rm faces a liquidity constraint in the sense that there is no free cash at hand. If the original futures position generates an interim loss, the producer will have to raise additional cash in order to maintain the position.
Usually, the borrowing rate is higher than the interest rate applicable to any excess cash that might be generated by marking to market. Hence, the producer faces liquidity risk: If the futures position creates an intermediate loss, additional cash has to be raised which is costly. The producer will anticipate the possibility of additional liquidity needs arising from the futures position when deciding about the optimal hedging position in futures contracts. If the producer can also trade options on futures, he might use these options to manage the liquidity risk borne by the futures position. This will also a ect the size of the optimal futures position and the optimal production decision.
Arthritis is not only a disease of the elderly; it affects younger people as well. An estimated 4,600 Australian children in 2004–05 had arthritis. While remission is common, the disease can become chronic and result in complications over time. Juvenile arthritis also has adverse effects on children’s growth and musculoskeletal development.
Juvenile arthritis juvenile rheumatoid arthritis or juvenile chronic arthritis as it is sometimes referred to was declared a focus area under the Better Arthritis and Osteoporosis Care (BAOC) budget initiative of the Australian Government in 2006.
This paper presents a dynamic general equilibrium model of banking where asymmetric information about asset quality leads to illiquidity of real assets, liquidity transformation by banks, and bank capital requirements endogenously. The model provides explanations as to why banks can issue liquid liabilities while other assets are illiquid, and why part of bank liabilities must be outside equity, i.e., bank capital. Using this model, this paper analyzes the long-run effects of banking on economic growth as well as business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements in response to productivity shocks and changes in the degree of asymmetric information. This paper also discusses the implications of the model for dynamic bank capital requirements recently discussed in policy forums.
The model is a version of the AK model, where goods are produced from productive real assets (physical capital) and new real assets are produced from goods. In the model, the fraction of agents who can produce new real assets, which is determined by idiosyncratic shocks, is so small that income from these agents’ real assets is not enough to achieve the efficient level of aggregate investment in new real assets. Agents who can produce new real assets can obtain goods from other agents by selling their existing real assets in a competitive secondary market. However, because the productivity of each real asset is private information for the seller in the secondary market, the secondary market price of real assets becomes identical for every real asset sold, undervaluing high-quality real assets. The market’s undervaluation discourages agents who can produce new real assets from selling the high-quality fraction of their real assets, resulting in a decline in the transfer of goods to these agents, which reduces aggregate investment in new real assets. The market’s undervaluation is the definition of illiquidity in this paper.
