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Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure

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  • Uluc Aysun

    (University of Connecticut)

  • Melanie Guldi

    (Mount Holyoke College)

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.

Suggested Citation

  • Uluc Aysun & Melanie Guldi, 2008. "Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure," Working papers 2008-06, University of Connecticut, Department of Economics, revised Oct 2008.
  • Handle: RePEc:uct:uconnp:2008-06
    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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    More about this item

    Keywords

    Exchange rate exposure; derivatives; emerging markets;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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