Hedging commodity price risks in Papua New Guinea

Abstract

This paper shows that market-based financial instruments are better suited to manage external price risk for a country that is a price taker in world commodity markets. This is especially the case for mineral and energy price risks where financial instruments (such as commodity swaps) exist for hedging export earnings over long periods. For agricultural export earnings, short-term hedging tools, such as options and futures, could be used effectively. The authors design specific financial strategies that Papua New Guinea could use, and demonstrate the gains to be made from active risk management. The authors concludes that the lessons learned are not unique. Many developing countries are heavily dependent on primary commodities for foreign exchange, and their economic development has suffered from the resulting risks and instabilities. With increasing awareness of these risks and with technical assistance - strategic advice and assistance in institution building and skills training - developing countries can learn to use financial instruments to improve their economic management.Banks&Banking Reform,Environmental Economics&Policies,Access to Markets,Markets and Market Access,Economic Theory&Research