Since the fall of the Bretton Woods agreement and the rise of a floating exchange rate regime, there has been a marked increase in the volatility of exchange rates. The movement of exchange rates relative to other currencies, or exchange rate variability is seen as a risk by importers and exporters. The uncertainty surrounding exchange rate movements affects importers and exporters who must determine domestic prices of traded goods without knowing how the exchange rate will move between the time an order is placed and the time payment is due. Theory supports that as exchange rate variability increases, ceteris paribus, international trade will fall.



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