Discussion: The Denomination of Foreign Trade Contracts Once Again

Abstract

Bradford Cornell's paper develops a small, but important result for the literature on currency of denomination of international trade contracts. The selection of a contract currency determines which party will bear exchange risk in addition to inflation risk. The contract currency problem in international trade is therefore closely related to other contracting issues, such as the pricing of nominal bonds under inflation uncertainty. More graphically, exchange risk can be illustrated by a difference in the units ofaccount of income and consumption streams. For example, if an agent produces only corn and consumes only wheat, he faces an exchange risk if the price of wheat relative to cornis uncertain.