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Multiple uncertainty, forward-futures markets and international trade

Author

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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 our study is the robustness of the known results regarding the role of forward-futures markets in the presence of cost and output uncertainty. 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," Discussion Papers, Series II 255, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  • Handle: RePEc:zbw:kondp2:255
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    References listed on IDEAS

    as
    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. Kawai, Masahiro, 1981. "The Behaviour of an Open-Economy Firm under Flexible Exchange Rates," Economica, London School of Economics and Political Science, vol. 48(189), pages 45-60, February.
    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, Oxford University Press, 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. Saarenheimo, Tuomas, 1995. "Credit crunch caused investment slump? : An empirical analysis using finnish data," Research Discussion Papers 6/1995, Bank of Finland.

    More about this item

    Keywords

    uncertainty; risk aversion; incomplete markets; forward rate; futures rate;

    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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