February 9, 2012
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.

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.
Authors
Bas Straathof
Paolo Calio
Related
CPB verkent mogelijkheden voor extra koopkrachtanalysesNieuwe haven Bonaire: lagere kosten, natuur en verdeling vragen aandachtMeerdere factoren van invloed op gestegen inflatieBelastinggemotiveerde royaltystromen: omvang van misgelopen belastingenLeennormen hypotheken versterken groei particuliere huur