International Trade, Hedging and the Demand for Forward Contracts
AbstractThere is a huge literature on the effects of uncertainty on trade levels. One very strong result of that literature is that uncertainty should not matter, as long as well developed forward markets exist. The empirical implications of this result, however, are hard to find in the data. We model terms of trade uncertainty in a small open economy with uncertainty stemming from abroad and derive the equilibrium demand for forward contracts. It turns out that risk averse agents will not buy forwards at an actuarially fair price, thus rendering both the full-hedge theorem and the separation theorem of the afore-mentioned literature obsolete. Using real world data for Germany we calibrate our model. We find that in equilibrium risk averse agents will buy forward cover only for investment reasons. The amount of forwards purchased is around 20% of equilibrium imports. This is broadly in accordance with empirical observed ratios.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2003022.
Date of creation: 01 Nov 2003
Date of revision:
Other versions of this item:
- Jens Eisenschmidt & Klaus Wälde, 2007. "International Trade, Hedging, and the Demand for Forward Contracts," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 414-429, 05.
- 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.
- 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)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
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