Asian Currency Cooperation and the Potential Microeconomic Effects of Reduced Exchange Rate Fluctuations

Foreign exchange fluctuations are an external risk for international cooperation and hinder cross-border trade. From an economic perspective this results in lost trade opportunities. Therefore, this chapter assumes stabilization of the real exchange rate as the major target of currency cooperation. Some basics of corporate currency risk and exposure (management) are summarized. The aim is to highlight the determinants of currency risk. These are contrasted with some readily available empirical data on (South-) East Asia that refer to fluctuations of regional real exchange rates, trade structures and corporate foreign exchange risk management procedures. This analysis shows that none of the determinants of corporate foreign exchange risk have any apparent empirical relevance. Accordingly, the results cast doubt on the positive net effects of further regional currency cooperation.