Optimal Commodity Price Hedging
Peer Reviewed
Date issued
December 2022
Subject
Commodity Export;
Oil Price;
Gross Domestic Product;
Petroleum;
Public Debt;
Commodity Price;
Economy;
Small Business;
Labor;
Public Expenditure;
Export;
Fiscal Policy;
Productive Transformation;
Extractive Industry
JEL code
G13 - Contingent Pricing • Futures Pricing;
H3 - Fiscal Policies and Behavior of Economic Agents;
H63 - Debt • Debt Management • Sovereign Debt
Category
Discussion Papers
The dependence of many countries in the region on oil exports makes them vulnerable to oil price volatility. In particular, the sharp declines observed between 2014 and 2016 show how public finances weakened with significant debt increases in these countries. A strategy to mitigate the effect of sharp falls in oil prices would allow oil exporting countries to suffer a smaller impact on their public finances. This paper shows that using put options to insure against oil price hikes lowers public debt and fiscal deficits.
NO