Rafael Eldor

Optimal hedging in the futures market under price uncertainty

Abstract We show that there exists a simple optimal hedging rule in the futures markets, for all risk averse decision makers, given that (a) futures price today is an unbiased predictor of the futures price next period, (b) basis is independent of the spot price.

Optimal international hedging in commodity and currency forward markets

Abstract This paper derives optimal hedging and production rules for an exporting firm which faces both commodity-price and foreign- exchange-rate uncertainty. The size of the commodity hedge is independent of the properties of the foreign-exchange market. However, the optimal foreign-exchange hedge depends on the commodity hedge and the properties of the commodity forward market. The firms production decision is independent of its objective function if both forward markets exist, but depends on the consumption beta of the unhedgeable risks in the absence of one or both of the markets.

Home Asset Preference and Productivity Shocks

This paper presents (sufficient) conditions for the domestic investor/consumer to hold in equilibrium a disproportionate share of domestic assets. The analysis is carried out in a general equilibrium framework of products and assets markets, when the source of the uncertainty is productivity shocks in the nontraded goods industries. In the asset markets we allow trade in instruments with a payoff which is not necessarily positively correlated with the price of the consumption good, as the instruments considered in the existing literature. Consequently, in our analysis, in contrast to the existing literature, hedging against price uncertainty is neither necessary nor sufficient for home asset preference.

Exporting Firm and Forward Markets: The Multiperiod Case

We consider a model with a competitive risk-averse exporting firm who faces uncertain exchange rates in a multiperiod analysis. The capital stock (or fixed input) has to be determined at the outset while the variable input (labor) is chosen optimally at the beginning of each period, but before the realization of the exchange rate. We show that introducing unbiased currency forward markets decreases the capital/labor ratio in all periods. We also show that such a firm tends to ‘overhedge’ compared to the one-period cases. In some cases the introduction of unbiased forward markets results in higher investments and production in all dates.

Oligopoly, Uncertain Demand, and Forward Markets

This paper analyzes the Nash equilibrium behavior of risk-averse oligopolistic firms under uncertain demand. It is shown that in the presence of unbiased forward markets the Nash Equilibrium (NE) output increases, that is, forward markets enhance competition. Unlike the competitive or monopoly cases, here the introduction of an unbiased forward market may result in a (unique) NE in which all the firms are worse off.

Trade Liberalization and Domestic Monopoly: A Welfare Analysis

This paper uses a partial equilibrium analysis to show that a partial trade liberalization may reduce a countrys welfare due to a loss in monopolistic rent if it is carried out by a quota. The quota can be set by either the foreign or domestic government (it is considered as a voluntary export restraint if it is set by the foreign government). The quota rents in the case of a voluntary export restraint are captured by the foreign agent. Therefore, the reduction in the domestic countrys welfare is more likely in this case rather than in the case of the quota set by the domestic government. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Quotas as options: Valuation and equilibrium implications

Abstract This paper presents formulae for the values of quota licenses in stochastic environments that are based on observable parameters, and examines the impact of parameter changes on domestic equilibrium. We show that the option-pricing methodology currently used widely in the finance literature may be applied to the valuation of licenses in a potentially wide range of market environments.

Optimal spreading when spreading is optimal

Abstract This paper assumes an investor who has a non-traded position operating in a stochastic interest rates environment. The investor trades continuously either distinct futures contracts or distinct forward contracts in order to maximize his expected utility of terminal wealth. In order to reach the welfare level of the first best optimum, the investor must incorporate into his portfolio either two distinct futures contracts or two distinct forward contracts. The optimal forward contracts dynamic spreading strategy has two components, a speculative component and a minimum-variance hedging component. The minimum-variance hedging component is composed of a short position in the nearby contract and a long position in the deferred contract. The speculative component serves to replicate the growth optimum portfolio. The speculative component is composed of a short position in the contract which is the most negatively correlated with the growth optimum portfolio and a long position in the other contract. The marking-to-market procedure of the futures positions forces the investor to hold less futures contracts than the corresponding forward contract positions. The analysis is also extended to incomplete markets and to inter-market spreading.

On the Risk-Adjusted Effective Protection Rate

Using the assumptions of the Capital Asset Pricing Model this paper presents a measure of the effective protection rate which adjusts for the industrys risk. It is shown that if the tariff on the final good is greater (smaller) than the weighted average tariff on the traded inputs, then the effective protection increases (decreases) as one moves from an industry with low risk (low beta) to an industry with high risk (high beta), holding other things constant. The empirical methodology of the new measure is also provided, as well as several illustrations from U.S. industries.

On the valuation of currency options and exchange rate insurance programs

Abstract This paper provides pricing formulae for European and American call and put currency options. It then uses these formulae to show that the current systems of exchange rate insurance programs give rise to multiple effective exchange rate systems.