Currency derivatives and the disconnection between exchange rate volatility and international trade

Bas Straathof and Paolo Calio

No 203, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: 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.

JEL-codes: F13 F33 F36 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-mon and nep-opm
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