ABSTRACT
In price theory, it has been shown that price uncertainty leads to a decline in the output level for a perfectly competitive fi rm (e.g., Baron, 1970; Sandmo, 1971). On the other hand, the availability of hedging separates a fi rm’s decision on optimum production from the uncertain market price. In other words, the decision on optimal production level does not depend on the utility function or the probability distribution function of the uncertain price. All production and export decisions are made on the basis of the forward price.*
is result in price theory provides the main theoretical justifi cation for the impact of exchange rate risk on trade volumes. e works of Hooper and Kohlhagen (1978), Clark (1973), Ethier (1973), and Cushman (1986) provide some support for the theoretical studies by fi nding a negative relationship between currency risk and trade fl ows. Recently, however, some studies show necessary and suffi cient conditions that lead to positive or ambiguous relationships between currency risk and international trade. Some examples are the works of De Grauwe (1988), Neumann (1995), Franke (1991), and Giovannini (1988).
