exporting rms can easily borrow to overcome temporary uctuations in real costs associated with exchange rate movements. The most appropriate nancial instruments to hedge exchange rate risk are nancial derivatives, such as futures and forwards of exchange rates that allow rms to x the exchange rate at a future time, or exchange rate swaps that allow rms to trade exchange rate risks. However, these derivatives are relatively sophisticated and are not widely available, especially exchange rate futures that require some form of standardization and are traded in open exchanges. In most cases where there is a market for exchange rate risk this takes place over the counter. As mentioned in section 3, data on the depth of foreign exchange rate derivative markets comes from the Bank of International Settlements. The survey conducted by the BIS covers a set of 52 countries where these markets have some meaningful degree of activity. In the rest of the world, forex derivatives are largely nonexistent. However, even if there are no derivative markets that allow a rm to hedge exchange rate risk ex-ante, a well functioning nancial market may provide liquidity to exporters facing temporary diculties arising from exchange rate uctuations. Thus, even in absence of direct hedging options the role of natural hedging may be stronger in nancially underdeveloped countries.

To test the hypotheses that the degree of trade openness, and the development of forex derivatives and nancial markets reduce the importance of natural hedge, I estimate the parameters of equation (7) separately for dierent groups of countries formed according to the median level of each these characteristics, allowing therefore the natural hedge parameter _β_ to vary with these characteristics. The results of the estimation are reported in the two panels of Table 9. The rst two columns separately estimate the coecient among closed and open countries (i.e. those with total trade to GDP below and above the sample median, respectively). The results in both panels show a larger coecient for natural hedge among open countries (Column (2)) than among closed ones (Column (1)), but the dierence between these two groups is not signicantly dierent from zero (see the Test of Equality of Interaction row at the bottom of the table that reports the p-value for the test that the coecients in the two groups are identical).

The next two columns compare those countries where there is no forex derivatives market data and those where there is data, regardless of the size of the market (Columns (3) and (4), respectively) Surprisingly, the results clearly show that the coecient is more negative and signicant among countries where there is forex market data (Column (4)); in fact, in Panel A the coecient is one order of magnitude larger among these countries than among countries with no data on forex markets. In Panel B that looks at bilateral trade patterns the dierence between the two groups is smaller and statistically insignicant, although still the coecient is larger among countries with forex data.

The regressions in columns (5) and (6) estimate the parameters of equations (7) and (8) among those countries with data on forex derivatives. Even within this group, the coecient on natural hedge is more negative in countries with a high foreign exchange derivatives turnover, although the 23