Currency derivatives and the disconnection between exchange rate volatility and international trade
Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.
Currency derivatives and the disconnection between exchange rate volatility and international trade
Download (PDF document, 350.6 KB) | CPB Discussion Paper 203 | 9‑02‑2012 | 28 pages | ISBN 978‑90‑5833‑545‑6
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The impact of exchange rate volatility on international trade is small for industrialized countries, especially since the late 1980s. An explanation for this is Wei’s (1999) “hedging hypothesis”, which states that the availability of currency derivatives has changed the relation between exchange rate volatility and trade. Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.
