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Hedging Price Volatility Using Fast Transport

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  • Schaur, Georg

Abstract

Ocean transportation in international trade imposes a time lag between the departure and arrival of a shipment. This arrival lag creates a problem for firms selling in markets with volatile demand. Specifically, the quantity a firm ships via ocean at a given time may not maximize profits when it arrives. This paper examines whether fast but expensive transportation hedges this uncertainty. Fast air shipments allow a firm to wait until the uncertainty is revealed, meaning that high demand volatility urges greater air shipments. On the other hand, a higher price for air shipment raises the cost of waiting and causes a firm to choose greater ocean quantities to minimize the transport bill. The model in this paper identifies the tradeoff between uncertainty and transportation costs. Monthly data for US imports of merchandise separated by transport mode confirm the predictions.

Suggested Citation

  • Schaur, Georg, 2007. "Hedging Price Volatility Using Fast Transport," Conference papers 331578, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331578
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    JEL classification:

    • F1 - International Economics - - Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General

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