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Exchange rate volatility and international trade: The option approach

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  • Franke, Günter

Abstract

Usually it is argued that an increase in exchange rate volatility reduces the volume of international trade since trading firms are risk averse. This paper shows for risk neutral firms that the expected international trade volume in standardized commodities grows with exchange rate volatility. The firms adjust their trade volume to the exchange rate level. The more favorable the exchange rate is, the higher is the export volume. If the rate drops below some level, exports are stopped. Thus international trading represents an option for firms. Its value increases with exchange rate volatility.

Suggested Citation

  • Franke, Günter, 1986. "Exchange rate volatility and international trade: The option approach," Discussion Papers, Series II 12, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:12
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    References listed on IDEAS

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    1. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
    2. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-438, September.
    3. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    4. Peter B. Clark, 1973. "Uncertainty, Exchange Risk, And The Level Of International Trade," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 302-313, September.
    5. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August.
    6. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
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    Cited by:

    1. Siebert, Horst, 1987. "Entwicklungslinien der Weltwirtschaft: Stilisierte Fakten und Ansätze zur Erklärung," Discussion Papers, Series II 14, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    2. Broll, Udo & Wahl, Jack E., 1990. "The effect of forward markets and currency options on international trade," Discussion Papers, Series II 114, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    3. Siebert, Horst, 1987. "Entwicklungstendenzen der Weltwirtschaft: Stilisierte Fakten und Ansätze zur Erklärung," Open Access Publications from Kiel Institute for the World Economy 1347, Kiel Institute for the World Economy (IfW Kiel).

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