International Trade, Hedging, and the Demand for Forward Contracts

16 Pages Posted: 2 May 2007

See all articles by Jens Eisenschmidt

Jens Eisenschmidt

European Central Bank (ECB)

Klaus Wälde

University of Mainz; CESifo (Center for Economic Studies and Ifo Institute); UCL at Louvain la Neuve

Abstract

One of the main results of the literature on the effects of uncertainty on trade states that uncertainty should not matter in the presence of well-developed forward markets. Empirical studies, however, do not support this result. We derive the demand for forward cover in a small open economy with terms-of-trade uncertainty. Adopting a standard and more realistic decision structure than the one usually used in this literature, we find that risk-averse agents will not buy forwards at an unbiased price. Agents treat forward contracts as an asset rather than as an insurance. This is the reason why, when calibrating the model, only 17% of imports are covered by forwards.

Suggested Citation

Eisenschmidt, Jens and Wälde, Klaus, International Trade, Hedging, and the Demand for Forward Contracts. Review of International Economics, Vol. 15, No. 2, pp. 414-429, May 2007, Available at SSRN: https://ssrn.com/abstract=983241 or http://dx.doi.org/10.1111/j.1467-9396.2007.00685.x

Jens Eisenschmidt (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Klaus Wälde

University of Mainz ( email )

Mainz School of Management and Economics
Mainz, 55128
Germany
+49 6131 3920143 (Phone)

HOME PAGE: http://www.waelde.com

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

UCL at Louvain la Neuve

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
26
Abstract Views
742
PlumX Metrics