An in-depth study of currency selection for trade invoicing.
Written in 2007; 5,170 words; 5 sources; MLA; $ 129.95
Paper Summary:
The paper addresses the issue of identifying the factors affecting the currency selection in invoicing the international trade. The paper empirically analyses the change in composition of the foreign exchange reserves across countries on the basis of the IMF COFER (currency composition of official foreign exchange reserves) data and their relation to invoicing currency in foreign trade. The paper also discusses the mechanisms how exchange rates pass through into prices of goods as they enter a country. Finally, the paper discusses the future role of the Euro currency in trade balance and in foreign assets reserves and the policy implications of this.
From the Paper:
"The choice of currency for trade invoicing came to depend on many factors especially after most of the world's currencies became freely floating. This leads to not only price uncertainty but also to uncertainties of demand. One of the main findings of the early literature is that traders seek to avoid currency risk by using their own currency. If prices are set before the exchange rate fluctuations are known, and orders are placed after the shock to the exchange rate, then the exporter faces 'demand uncertainty' if the exporter invoices the transaction in his own currency (PCP). If the exporter, on the other hand, prices the goods in local currency (LCP), as the exporter does not know which price he will receive (in his own currency), 'price uncertainty' arises."
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