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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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    Cited by:

    1. 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.
    2. Kannapiran, Chinna A., 2000. "Commodity price stabilisation: macroeconomic impacts and policy options," Agricultural Economics, Blackwell, vol. 23(1), pages 17-30, June.
    3. Claessens, Stijn, 2005. "Taking stock of risk management techniques for sovereigns," Policy Research Working Paper Series 3570, The World Bank.
    4. Mauricio Drelichman & Hans-Joachim Voth, 2013. "Contingent Sovereign Debt Contracts: The Historical Perspective," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(03), pages 28-32, October.
    5. Kletzer, Kenneth, 2004. "Sovereign Debt, Volatility and Insurance," Santa Cruz Department of Economics, Working Paper Series qt71b785gd, Department of Economics, UC Santa Cruz.
    6. Bernardo Guimaraes, 2007. "Optimal external debt and default," 2007 Meeting Papers 104, Society for Economic Dynamics.
    7. 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.
    8. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    9. Yothin Jinjarak, 2004. "On the hidden links between financing costs and international trade patterns," Econometric Society 2004 Far Eastern Meetings 501, Econometric Society.
    10. 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.
    11. 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.
    12. repec:ces:ifodic:v:11:y:2013:i:3:p:19099075 is not listed on IDEAS
    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. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Santa Cruz Department of Economics, Working Paper Series qt4qg3c42v, Department of Economics, UC Santa Cruz.
    15. Mr. Benedict F. W. Bingham & Mr. James Daniel & Mr. Giulio Federico, 2001. "Domestic Petroleum Price Smoothing in Developing and Transition Countries," IMF Working Papers 2001/075, International Monetary Fund.

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