Network modeling of international financial equilibria with hedging

In this paper, we develop an international financial equilibrium model with hedging in the form of futures and options contracts. We identify the network structure of the individual sectors' optimization problems out of equilibrium and establish the network structure of the entire international financial economy in equilibrium. We formulate the governing equilibrium conditions as a finite-dimensional variational inequality problem and then present some qualitative properties. Finally, we propose a computational procedure, along with convergence results, which resolves the variational inequality problem into network subproblems with special structure, each of which can then be solved exactly and in closed form.