We build a risk management model that incorporates variable capital utilization and procyclical collateral capacity. The former means that capital utilization determines production, which affects capital depreciation and risk exposure, linking capital utilization to firms' risk management decisions. The latter means that the ability to borrow and hedge increases with expected profitability. Using a new dataset on hedging and capital utilization of oil and gas producers, we employ novel identification strategies and find that hedging is positively correlated with corporate liquidity and expected profitability, whereas utilization is negatively correlated with liquidity. These results support the key predictions of our theory.

Keywords: Corporate hedging, Corporate liquidity, Financial constraints, Expected profitability, Collateral constraint, Procyclical collateral capacity, Variable capital utilization.

JEL Classifications: G23, G30, G32.​​