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Multiple uncertainty, forward-futures markets and international trade

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  • Viaene, Jean-Marie
  • Zilcha, Itzhak

Abstract

The optimum behavior of a competitive risk-averse international trader who supplies or demands commodities invoiced in foreign currency is examined when his profits are subject to several forms of risk: production, domestic cost, the exchange rate and the commodity price.The focus of the analysis lies in the optimality conditions for the level of trade and the extent of forward exchange and commodity futures commitments.New results on the implications of the framework for the separation and the double-hedging theorems are derived.The behavior of the same firm with and without complete markets is compared and conditions are obtained for a domestic price guarantee or a gradual introduction of missing markets to promote the level of international trade.

Suggested Citation

  • Viaene, Jean-Marie & Zilcha, Itzhak, 1995. "Multiple uncertainty, forward-futures markets and international trade," Bank of Finland Research Discussion Papers 3/1995, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1995_003
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    References listed on IDEAS

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    1. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
    2. Van Nieuwkerk, Marius, 1979. "The covering of exchange risks in the Netherlands' foreign trade : A note," Journal of International Economics, Elsevier, vol. 9(1), pages 89-93, February.
    3. Viaene, Jean-Marie & de Vries, Casper G., 1992. "International trade and exchange rate volatility," European Economic Review, Elsevier, vol. 36(6), pages 1311-1321, August.
    4. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December.
    5. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
    6. repec:bla:econom:v:48:y:1981:i:189:p:45-60 is not listed on IDEAS
    7. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
    8. Baron, David P, 1976. "Flexible Exchange Rates, Forward Markets, and the Level of Trade," American Economic Review, American Economic Association, vol. 66(3), pages 253-266, June.
    9. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
    10. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 317-328.
    11. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, vol. 93(37), pages 370-389, June.
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    Cited by:

    1. Murto, Risto, 1995. "The banking crisis, banking policy regimes and the value of a bank," Research Discussion Papers 14/1995, Bank of Finland.
    2. repec:zbw:bofrdp:1995_014 is not listed on IDEAS
    3. Takala, Kari, 1995. "Permanent income hypothesis and saving in Finland," Bank of Finland Research Discussion Papers 15/1995, Bank of Finland.
    4. repec:zbw:bofrdp:1995_006 is not listed on IDEAS
    5. Kajanoja, Lauri, 1995. "Aggregate investment and corporate indebtedness , Some empirical avidence from Finland," Bank of Finland Research Discussion Papers 10/1995, Bank of Finland.
    6. Saarenheimo, Tuomas, 1995. "Credit crunch caused investment slump? : An empirical analysis using finnish data," Research Discussion Papers 6/1995, Bank of Finland.
    7. Hilpinen, Jorma, 1995. "Compilation of early warning indicators for foreign trade employing a cut-off survey," Bank of Finland Research Discussion Papers 25/1995, Bank of Finland.
    8. Murto, Risto, 1995. "The banking crisis, banking policy regimes and the value of a bank," Bank of Finland Research Discussion Papers 14/1995, Bank of Finland.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F19 - International Economics - - Trade - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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