DP7513 Macro-Hedging for Commodity Exporters

Author(s): Eduardo Borensztein, Olivier Jeanne, Damiano Sandri
Publication Date: October 2009
Keyword(s): commodity exports, default, futures, hedging, international reserves, options, precautionary savings
JEL(s): C61, E21, F30, F40, G13
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7513

This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. We show that 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.