International Trade, Hedging, and the Demand for Forward Contracts
AbstractOne of the main results of the literature on the effects of uncertainty on trade states that uncertainty should not matter in the presence of well-developed forward markets. Empirical studies, however, do not support this result. We derive the demand for forward cover in a small open economy with terms-of-trade uncertainty. Adopting a standard and more realistic decision structure than the one usually used in this literature, we find that risk-averse agents will not buy forwards at an unbiased price. Agents treat forward contracts as an asset rather than as an insurance. This is the reason why, when calibrating the model, only 17% of imports are covered by forwards. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of International Economics.
Volume (Year): 15 (2007)
Issue (Month): 2 (05)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576
Other versions of this item:
- Eisenschmidt, Jens & Wälde, Klaus, 2003. "International trade, hedging and the demand for forward contracts," Dresden Discussion Paper Series in Economics 19/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
- Jens, EISENSCHMIDT & Klaus, WAELDE, 2003. "International Trade, Hedging and the Demand for Forward Contracts," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Eisenschmidt, Jens & Wälde, Klaus, 2006. "International Trade, Hedging and the Demand for Forward Contracts," W.E.P. - WÃ¼rzburg Economic Papers 69, University of Würzburg, Chair for Monetary Policy and International Economics.
- F00 - International Economics - - General - - - General
- F30 - International Economics - - International Finance - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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