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Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance

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  • Kletzer, Ken
  • Newbery, David M
  • Wright, Brian D

Abstract

The costs of primary commodity price instability are reviewed and can be significant. Stabilization is problematic, given high serial correlation. Rolling over a sequence of one-year futures hedges can be quite effective and the optimal hedge is derived but encounters the problem of sovereign default risk. So does international lending and borrowing to smooth consumption. The authors derive the constrained optimal fully state-contingent contract for consumption smoothing of identically independent distributed and first order serially correlated price risks in the absence of enforceable contracts and compare this with more liquid commodity bond options and loan contracts. Copyright 1992 by Royal Economic Society.

Suggested Citation

  • Kletzer, Ken & Newbery, David M & Wright, Brian D, 1992. "Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 641-671, October.
  • Handle: RePEc:oup:oxecpp:v:44:y:1992:i:4:p:641-71
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    Citations

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    Cited by:

    1. Kletzer, Kenneth, 2004. "Sovereign Debt, Volatility and Insurance," Santa Cruz Center for International Economics, Working Paper Series qt71b785gd, Center for International Economics, UC Santa Cruz.
    2. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
    3. Yothin Jinjarak, 2004. "On the hidden links between financing costs and international trade patterns," Econometric Society 2004 Far Eastern Meetings 501, Econometric Society.
    4. Kannapiran, Chinna A., 2000. "Commodity price stabilisation: macroeconomic impacts and policy options," Agricultural Economics, Blackwell, vol. 23(1), pages 17-30, June.
    5. Hühnerbein, Ossip Robert, 2007. "Sovereign Debt Contracts and Financial Stability in Emerging Market Economies," Munich Dissertations in Economics 7302, University of Munich, Department of Economics.
    6. Claessens, Stijn, 2005. "Taking stock of risk management techniques for sovereigns," Policy Research Working Paper Series 3570, The World Bank.
    7. van der Ploeg, Frederick, 2006. "Challenges and Opportunities for Resource Rich Economies," CEPR Discussion Papers 5688, C.E.P.R. Discussion Papers.
    8. Benedict F. W. Bingham & James Daniel & Giulio Federico, 2001. "Domestic Petroleum Price Smoothing in Developing and Transition Countries," IMF Working Papers 01/75, International Monetary Fund.
    9. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
    10. repec:ces:ifodic:v:11:y:2013:i:3:p:19099075 is not listed on IDEAS
    11. Bernardo Guimaraes, 2007. "Optimal external debt and default," 2007 Meeting Papers 104, Society for Economic Dynamics.
    12. G. Benavides & P. N. Snowden, 2006. "Futures for farmers: Hedging participation and the Mexican corn scheme," Journal of Development Studies, Taylor & Francis Journals, vol. 42(4), pages 698-712.
    13. Ricardo Caballero & Stavros Panageas, 2005. "A Quantitative Model of Sudden Stops and External Liquidity Management," NBER Working Papers 11293, National Bureau of Economic Research, Inc.
    14. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    15. Kannapiran, Chinna A., 2000. "Commodity price stabilisation: macroeconomic impacts and policy options," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 23(1), June.

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