Hedging Price Volatility Using Fast Transport

Georg Schaur

No 331578, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

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.

Keywords: Demand and Price Analysis; Public Economics (search for similar items in EconPapers)
Pages: 43
Date: 2007
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Related works:
Journal Article: Hedging price volatility using fast transport (2010)
Working Paper: Hedging Price Volatility Using Fast Transport (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:331578

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