Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure

Uluc Aysun and Melanie Guldi

No 2008-06, Working papers from University of Connecticut, Department of Economics

Abstract: Using firm level data, we report a significant fall in the exchange rate exposure of emerging market firms over the past 10 years, and relate this to higher derivatives market participation. Our methodology follows a three stage approach. First, we measure and report foreign exchange exposures for each year using the popularized extension of the Adler-Dumas (1984) model. Next, we use an indirect approach to estimate the derivatives market participation at the firm level. Finally, we investigate the implications of the level of derivative market activity on a firm's foreign exchange exposure. Our results show that foreign exchange exposure is negatively related to derivatives usage, and support the hedging explanation of the exchange rate exposure puzzle.

Keywords: Exchange rate exposure; derivatives; emerging markets (search for similar items in EconPapers)
JEL-codes: F31 G15 G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-03, Revised 2008-10
New Economics Papers: this item is included in nep-cfn and nep-ifn
Note: We are grateful to Thomas Schneeweis and Raj Gupta at the CISDM of UMass and Esen Onur for allowing us to access the data used in this paper. We would like to thank Charles Dale and the participants of the 2007 WEAI and EEA conferences, and the Colloquium series at University of Connecticut, Stamford.
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