Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure

Abstract

Using firm-level data, we show that higher derivatives market participation by emerging market firms contributed to the observed decline in the exchange rate exposure of these firms from 1995 to 2005. Our methodology follows a three-stage approach. First, we measure and report exchange rate exposures for each year using the popularized extension of the Adler and Dumas (1984) model. Next, we use an indirect methodology to estimate firms' derivatives market participation. Finally, we investigate the effects of derivatives market participation on firms' exchange rate exposure. Our results show that exposure is negatively related to derivatives usage.

Keywords:

• derivatives
• emerging markets
• exchange rate exposure