Macro-Hedging for Commodity Exporters

Author/Editor:

Eduardo Borensztein ; Damiano Sandri ; Olivier D Jeanne

Publication Date:

October 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.

Series:

Working Paper No. 09/229

Subject:

Commodities Commodity price fluctuations Cross country analysis Default Developing countries Economic models Export earnings Export markets Financial instruments Financial risk Futures Hedge funds Hedging International reserves International trade Options Precautionary savings Risk management

English

Publication Date:

October 1, 2009

ISBN/ISSN:

9781451873764/1018-5941

Stock No:

WPIEA2009229

Format:

Paper

Pages:

29

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