Wang Yaqi | Natural Hedging of Exchange Rate Risk: Exports and Imports of Intermediate Goods

On December 3, the 11th Annual Meeting of the China Council for the Study of International Trade (CTRG) was successfully held as part of the 2021 Academic Symposium on International Trade Disputes and the Restructuring of Globalization.Wang Yaqi, Associate Professor, School of Finance, Central University of Finance and EconomicsAttended and shared with collaborators (see below) on the topic of"exchangeNatural hedging against rate risk: exports and intermediate goods importsNatural hedging of exchange rate risk: exports and imports of intermediate goodsThe article.

Article author

Wang Yaqi received her Ph.D. from the National School of Development at Peking University in 2015. She is currently an Associate Professor at the School of Finance, Central University of Finance and Economics, and a Research Fellow at the International Finance Research Center. Her main research areas are international economics, applied microeconomics, and the Chinese economy. She has published articles in journals such as *World Economy*, *Management World*, *Financial Research*, and *Quarterly Journal of Economics*.Journal of Economic Behavior and Organization, Journal of Comparative Economics He has published several academic articles in well-known domestic and international journals.

 Wang Yaqi

Professor Wang YaqiArticles with his collaboratorsThis paper analyzes the impact of exchange rate fluctuations on firm exports and the hedging role of intermediate goods imports. Within a theoretical framework assuming risk aversion among exporting firms, the paper examines the impact of exchange rate fluctuations on exports and discusses the role of intermediate goods imports. Based on the hypotheses proposed in the theoretical section, this paper conducts empirical tests using customs import and export transaction data at the year-by-year level for firm destinations from 2010 to 2015. The results show that exchange rate fluctuations have a suppressive effect on firm exports; the stronger the correlation between the weighted exchange rate fluctuations of import and export trade, the weaker the suppressive effect of exchange rate fluctuations on exports, indicating that firms' intermediate goods imports have a hedging effect against exchange rate risk. The empirical results remain valid under a series of robustness tests. Furthermore, we decompose exports into intensive and extensive margins to discuss the impact of exchange rate fluctuations and intermediate goods imports. In addition, our research shows that when making decisions about importing intermediate goods, exporting firms tend to choose sources of intermediate goods that are more correlated with the exchange rate fluctuations of their export destinations to achieve a natural hedging of exchange rate risk. Finally, this paper also discusses, from a policy perspective, how to adjust and utilize global value chain layouts to help firms establish risk-neutral operating strategies.

Chen Bo

Professor Chen Bo, Department of Economics, Huazhong University of Science and TechnologyThis paper argues that its analysis of international trade from the perspective of foreign exchange risk is particularly ingenious compared to pure international trade analysis. Four suggestions are offered: First, the paper's innovations need further empirical development, and the theoretical portion should not be excessive, as the economic intuition is very clear and the theoretical explanation can be added later. Second, the contribution of micro-data to the paper's innovations should be explained in more detail. For example, the elasticity explanation is based on micro-data; the innovation could highlight elasticity and provide a clearer explanation of its meaning. Third, it is suggested to add an independent term to the correlation between import and export exchange rates and utilize the export exchange rate lagged by one year. Fourth, it is recommended that heterogeneity analysis (such as ownership and region) be used as control variables in the preceding regressions.

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CTRG attendees and scholars