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Macro-hedging for commodity exporters

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  • Borensztein, Eduardo
  • Jeanne, Olivier
  • Sandri, Damiano

Abstract

This paper uses a dynamic optimization model to quantify the potential welfare gains of hedging against commodity price risk for commodity-exporting countries. We show that hedging enhances domestic welfare through two channels: first, by reducing export income volatility; and second, by reducing the country's need to hold precautionary reserves and improving the country's ability to borrow against future export income. Under plausible calibrations of the model, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.

Suggested Citation

  • Borensztein, Eduardo & Jeanne, Olivier & Sandri, Damiano, 2013. "Macro-hedging for commodity exporters," Journal of Development Economics, Elsevier, vol. 101(C), pages 105-116.
    • Handle: RePEc:eee:deveco:v:101:y:2013:i:c:p:105-116
    DOI: 10.1016/j.jdeveco.2012.08.005
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    More about this item

    Keywords

    Hedging; Commodity exports; Precautionary savings; International reserves; Futures; Options; Default;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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