Increase in exchange rate volatility
This paper provides an extensive survey of the literature on exchange rate volatility and trade, examining both the theory that underlies the work in this area and the results of empirical studies published since 1988. Despite the widespread view that an increase in volatility will reduce the level of trade, linkages increase exchange rate volatility insignificantly in developed countries, while they decrease volatility in developing countries. Higher internal finance (i.e. higher financial depth) increases exchange rate volatility in developed countries and decreases it in developed countries. The exchange rate risk is caused by fluctuations in the investor’s local currency compared to the foreign-investment currency. These risks can be mitigated through the use of a hedged exchange