Futures contracts, stabilization, and financial liberalization in Brazil: Three essays

Unhedged foreign investments face exchange rate risk. This risk can be mitigated with the use of efficiently priced futures contracts. If nothing else, the existence of futures trading on the exchange rate provides the market with better expectations about exchange rate risk. All else equal, this should allow investors to make better-informed decisions. Efficient pricing of exchange rate risk increases the attractiveness of the futures contract to hedgers and therefore is of importance to foreign investors. To measure the efficiency and behavior of the US Commercial Dollar Futures Contract the first section employees technical trading rule analysis and auto-regressive conditional heteroskedasticity models.;Although investments face interest rate risk, a study of this contract provides us with a vehicle for determining the existence of another source of risk: insider trading by those with macroeconomic inside information. All else equal, investors would prefer to have their capital in the most informationally transparent market. Inside traders make their profits at the expense of uninformed investors. If the futures market signals insider trading activity, foreign investors could theoretically react and adjust their investments accordingly. The second section specifies the implication of insider trading in "economy-wide" risk on investment patterns and tests for the actual existence of insider trading by means of Granger causality.;A discussion of the role of financial liberalization on income distribution follows. Because of the distortions created by governmental interfering, the liberalizing of the financial sector comes to be viewed as a "quick fix" to the distortions created by the government-controlled system. The final section examines the conditions 6nder which the distortions may actually be exacerbated in the short-run and the policy implications that can be drawn from this.