Macro-Hedging for Commodity Exporters
International Monetary Fund, Oct 1, 2009 - Business & Economics - 29 pages
This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country''s need to hold foreign assets as precautionary savings (or by improving the country''s ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.
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absence of hedging allows the country assets and welfare balance sheet channel benchmark calibration benefits business cycle COMMODITY PRICE DATA consumer’s consumption function cost country’s external country’s pledgeable wealth default-free debt defaultable debt discount factor domestic consumer domestic output external borrowing constraint external debt foreign asset position forward contracts full insurance future export income futures contracts gains from futures gains from hedging gross foreign assets growth rate hedging instruments hedging strategy horizon of hedging income smoothing income volatility Intercontinental Exchange introduction of futures introduction of hedging issue more default-free Jeanne and Sandri large welfare gains maturity minimum present discounted net foreign asset NYMEX open interest position optimal parameter percent periods ahead persistence precautionary savings present discounted value price process price shocks reduce reports the welfare representative consumer risk premium small open economy sold forward spot price strike price target level transition equation τθ