International Trade, Hedging and the Demand for Forward Contracts

Jens Eisenschmidt and Waelde Klaus
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Waelde Klaus: University of Dresden and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de recherches économiques et sociales, IRES
Authors registered in the RePEc Author Service: Klaus Wälde

No 2003022, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques 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.

JEL-codes: F00 F30 G10 (search for similar items in EconPapers)
Pages: 26
Date: 2003-11-01
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http://sites.uclouvain.be/econ/DP/IRES/2003-22.pdf (application/pdf)

Related works:
Journal Article: International Trade, Hedging, and the Demand for Forward Contracts* (2007)
Working Paper: International Trade, Hedging and the Demand for Forward Contracts (2006)
Working Paper: International trade, hedging and the demand for forward contracts (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2003022

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