Import-Export Linkages and Natural Hedging of Exchange Rate Risk
(joint with )In Progress
Abstract: This paper explores how import and export trade linkages can help firms hedge exchange rate risk. I provide empirical evidence that exchange rate shocks from the export market and the source of imports have opposite effects. Exchange rate movements at the destination of a firm’s exports are offset by exchange rate movements at the source of imports, and thus import-export linkages help mitigate the impact of exchange rate shocks on export performance. I will further discuss multilateral exchange rate correlations, where a firm’s mix of export markets and import sources will affect its effectiveness in hedging exchange rate risk. I will develop a trade model with nominal price and currency components. The exchange rate risk faced by a firm depends on its network of exports and imports.
Recommended citation: Lingfei Lu. Import-Export Linkages and Natural Hedging of Exchange Rate Risk; In Progress (2025).