Commodity price shocks have negative consequences for developed economies that rely heavily on imported materials. Consequently, firms employ risk-management instruments to reduce their exposure. In this paper we study how the use of supply contracts by firms can shape the transmission of commodity price shocks to aggregate variables. We focus on purchase obligations, which are supply contracts with fixed prices for the delivery of goods in future periods. We rely on a novel dataset to document two empirical findings. First, we find a large exposure reduction to commodity price risk for firms using these contracts; our estimates suggest a reduction of about 10% to 45% compared with non-users. Second, sector output and labor compensation have a smaller negative correlation with commodity prices when firms trade larger contracts. We assess the aggregate quantitative role of these contracts by introducing and calibrating a tractable general equilibrium model. We measure the contribution of purchase obligations to dampening the aggregate transmission of commodity price shocks by constructing a counterfactual in which firms are not allowed to trade these contracts. Our results show that when firms engage in purchase obligations, real consumption has a relative response of 4% less to a 10% commodity price shock.
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