International trade and hedging in economies in transition

Abstract

This paper develops a general equilibrium framework to analyze risk management policies in economies in transition. By cross-hedging against real exchange rate risk exposures, these economies can increase their gains from international trade. We suggest that countries with emerging forward markets can gradually introduce the risk sharing markets, as limiting resources may prevent them from introducing complete hedging markets in the first place. Thus the growing demand for risk management instruments can be gradually met and it would be welfare enhancing. Economies in transition benefit when hedging devices are offered by financial markets, irrespective of whether the hedging instruments are de facto perfect or not. © 2001 Elsevier Science B.V.