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International Trade, Hedging and the Demand for Forward Contracts

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  • Jens, EISENSCHMIDT

    (Technische Universitat Dresden, Germany)

  • Klaus, WAELDE

    (University of Dresden and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de recherches économiques et sociales, IRES)

Abstract

There is a huge literature on the effects of uncertainty on trade levels. One very strong result of that literature is that uncertainty should not matter, as long as well developed forward markets exist. The empirical implications of this result, however, are hard to find in the data. We model terms of trade uncertainty in a small open economy with uncertainty stemming from abroad and derive the equilibrium demand for forward contracts. It turns out that risk averse agents will not buy forwards at an actuarially fair price, thus rendering both the full-hedge theorem and the separation theorem of the afore-mentioned literature obsolete. Using real world data for Germany we calibrate our model. We find that in equilibrium risk averse agents will buy forward cover only for investment reasons. The amount of forwards purchased is around 20% of equilibrium imports. This is broadly in accordance with empirical observed ratios.

Suggested Citation

  • Jens, EISENSCHMIDT & Klaus, WAELDE, 2003. "International Trade, Hedging and the Demand for Forward Contracts," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2003022
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    References listed on IDEAS

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    Cited by:

    1. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.

    More about this item

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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