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Macro-Hedging for Commodity Exporters

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  • Eduardo Borensztein
  • Damiano Sandri
  • Olivier Jeanne

Abstract

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/229.

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Length: 29
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/229

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Keywords: Commodity price fluctuations; Developing countries; Economic models; Export earnings; Export markets; Financial instruments; Financial risk; Hedge funds; Risk management; hedging; hedging instruments; forward contracts; open interest; commodity prices; futures contracts; hedge; commodity stabilization; futures trading; international finance; capital flows; international reserves; credit constraint; hedging strategies; forward contract; put options; international finance statistics; risk aversion; financial innovation; futures prices; discount rate; hedges; export revenues; present value; forward market; derivative instruments; international financial statistics; hedging price risk; commodity futures; price hedging; futures options; derivative; financial intermediaries;

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References

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  1. Paolo Mauro & Törbjörn I. Becker & Jonathan David Ostry & Romain Ranciere & Olivier Jeanne, 2007. "Country Insurance," IMF Occasional Papers 254, International Monetary Fund.
  2. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
  3. Marco E. Terrones & Enrique G. Mendoza & Ceyhun Bora Durdu, 2008. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism," 2008 Meeting Papers 56, Society for Economic Dynamics.
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  5. Caballero, Ricardo J. & Panageas, Stavros, 2008. "Hedging sudden stops and precautionary contractions," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 28-57, February.
  6. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
  7. Pagano, Patrizio & Pisani, Massimiliano, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series 0999, European Central Bank.
  8. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
  9. Arrau, Patricio & Claessens, Stijn, 1992. "Commodity stabilization funds," Policy Research Working Paper Series 835, The World Bank.
  10. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
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  12. Christopher D. Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," NBER Technical Working Papers 0309, National Bureau of Economic Research, Inc.
  13. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  14. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
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  16. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Landon, Stuart & Smith, Constance, 2014. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," Working Papers 2014-1, University of Alberta, Department of Economics.
  2. Cherif, Reda & Hasanov, Fuad, 2011. "The volatility trap: why do big savers invest relatively little?," MPRA Paper 31286, University Library of Munich, Germany.
  3. Le Pen, Yannick & Sévi, Benoît, 2010. "Revisiting the excess co-movements of commodity prices in a data-rich environment," Economics Papers from University Paris Dauphine 123456789/6800, Paris Dauphine University.
  4. repec:ipg:wpaper:19 is not listed on IDEAS
  5. Reda Cherif & Fuad Hasanov, 2012. "Oil Exporters' Dilemma," IMF Working Papers 12/4, International Monetary Fund.
  6. Yannick Le Pen & Benoît Sévi, 2011. "Macro factors in oil futures returns," Economie Internationale, CEPII research center, issue 126-127, pages 13-38.
  7. Sévi, Benoît & Le Pen, Yannick, 2013. "Futures trading and the excess comovement of commodity prices," Economics Papers from University Paris Dauphine 123456789/11382, Paris Dauphine University.
  8. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
  9. Ton S. van den Bremer & Frederick van der Ploeg, 2012. "How to Spend a Windfall: Dealing with volatility and capital scarcity," OxCarre Working Papers 085, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  10. Gondo, Rocío, 2014. "State Contingent Assets, Financial Crises and Pecuniary Externalities in Models with Collateral Constraints," Working Papers 2014-001, Banco Central de Reserva del Perú.
  11. Stuart Landon & Constance Smith, 2010. "Energy Prices and Alberta Government Revenue Volatility," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 313, November.
  12. Issouf Samaké & Nicola Spatafora, 2012. "Commodity Price Shocks and Fiscal Outcomes," IMF Working Papers 12/112, International Monetary Fund.
  13. Reda Cherif & Fuad Hasanov, 2012. "The Volatility Trap," IMF Working Papers 12/134, International Monetary Fund.
  14. Stuart Landon & Constance Smith, 2010. "Government Revenue Volatility: The Case of Alberta, an Energy Dependent Economy," EERI Research Paper Series EERI_RP_2010_23, Economics and Econometrics Research Institute (EERI), Brussels.
  15. Massol, Olivier & Banal-Estañol, Albert, 2014. "Export diversification through resource-based industrialization: The case of natural gas," European Journal of Operational Research, Elsevier, vol. 237(3), pages 1067-1082.
  16. Dobronogov, Anton & Keutiben, Octave, 2014. "Containing volatility : windfall revenues for resource-rich low-income countries," Policy Research Working Paper Series 6956, The World Bank.
  17. Cherif, Reda & Hasanov, Fuad, 2013. "Oil Exporters’ Dilemma: How Much to Save and How Much to Invest," World Development, Elsevier, vol. 52(C), pages 120-131.

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