The framework presents how trading in the foreign commodity futures market and the forwardudexchange market can affect the optimal spot positions of domestic commodity producers and traders.udIt generalizes the models of Kawai and Zilcha (1986) and Kofman and Viaene (1991) to allow bothudintermediate and final commodities to be traded in the international and futures markets, and theudexporters/importers to face production shock, domestic factor costs and a random price. Applyingudmean-variance expected utility, we find that a rise in the expected exchange rate can raise both supplyudand demand for commodities and reduce domestic prices if the exchange rate elasticity of supply isudgreater than that of demand. Whether higher volatilities of exchange rate and foreign futures price canudreduce the optimal spot position of domestic traders depends on the correlation between the exchangeudrate and the foreign futures price. Even though the forward exchange market is unbiased, and there isudno correlation between commodity prices and exchange rates, the exchange rate can still affectuddomestic trading and prices through offshore hedging and international trade if the traders areudinterested in their profit in domestic currency. It illustrates how the world prices and foreign futuresudprices of commodities and their volatility can be transmitted to the domestic market as well as theuddynamic relationship between intermediate and final goods prices. The equilibrium prices depends onudtrader behaviour i.e. who trades or does not trade in the foreign commodity futures and domesticudforward currency markets. The empirical result applying a two-stage-least-squares approach to Thaiudrice and rubber prices supports the theoretical result.
展开▼
