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Exchange rate volatility and international trade: The option approach


  • Franke, Günter


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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    Cited by:

    1. 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).

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