EXCHANGE-RATE VOLATILITY AND INTERNATIONAL TRADING STRATEGY

It is usually argued that an increase in exchange rate volatility reduces the volume of international trade as trading firms are risk averse. This paper shows that exporting firms benefit under fairly general conditions from an increase in exchange rate volatility. Firms optimally adjust their export volumes to the level of the exchange rate. Exporting is an option which is exercised if profitable. In addition, the paper presents conditions under which the volume of international trade grows with exchange rate volatility. © 1991.