International Risk Management: The Case of Cocoa and Coffee in the Ivory Coast
Sarassoro, Gboroton Fidele
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https://hdl.handle.net/2142/69889
Description
Title
International Risk Management: The Case of Cocoa and Coffee in the Ivory Coast
Author(s)
Sarassoro, Gboroton Fidele
Issue Date
1988
Doctoral Committee Chair(s)
Leuthold, Raymond M.
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Abstract
Due to economic conditions in international markets, several exporting countries including the Ivory Coast face a high level of export revenue fluctuation. These countries have often relied on international commodity organizations that use buffer stocks and/or quotas to stablize commodity prices. However, these organizations have had limited success in bringing exporters and importers to agree on either the target prices or the quotas. In addition, these organizations do not usually take into account exchange rate and interest rate risks. As a result, the achievements of these stablization organizations have been limited.
Portfolio theory as developed by Markowitz (1952) and applied to hedging in the futures markets by Johnson (1960) and Stein (1961) is used to construct a hedging model for the government marketing agency in the Ivory Coast responsible for cocoa and coffee exporting. This model takes into account quantity, price, exchange rate and interest rate risks simultaneously. An original and relatively simple method is developed to estimate this complex model. An alternative risk management model based on a safety first critieria is constructed and estimated using a non-linear constrained optimization algorithm.
The findings of the study are: (1) The cocoa, coffee, exchange rate and interest rate futures markets are useful risk management tools that can be used to substantially reduce risk and increase income relative to no hedging. (2) The cocoa, coffee, exchange rate and interest rate futures markets can be used to maximize income and guarantee with a high probability level that income will not fall below a pre-specified level (i.e., lowest income observed during the period 1976-1986). (3) In several instances, risk management calls for futures positions that resemble speculation. On occasions, the optimal marketing strategy consists of taking futures positions greater than the corresponding expected cash position, or of taking futures positions on the same side as the cash position. (4) Setting hedge ratios to be between 0 and 1 still leads to risk management results better than the no hedge strategy.
The policy recommendation from this dissertation is that commodity exporting countries with the same marketing arrangement as the Ivory Coast may successfully manage export revenue risk through the commodity and financial futures markets.
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