Nominal contracting in a world of uncertainty

This paper evaluates corporate sensitivity to relative price risk and inflation risk and suggests how the existence of various nominal contracts, particularly debt and forward contracts, may modify firm behavior under uncertainty. By differentiating between the two types of price risk, this paper demonstrates the distinct risk reduction functions served by forward contracts and debt. Debt primarily protects against inflation risk whereas forward contracts can be used to protect against relative price risk. Complications arise, however, because forward contracts, which are denominated in nominal terms, also have an impact on the firm's degree of inflation risk.