order of magnitude larger, which would result in more meaningful quantitative impacts.

Similar results are obtained for the bilateral trade patterns across countries. For a given exporterimporter pair, an increase in bilateral exchange rate volatility raises the relative export share of a commodity with a large negative correlation. The magnitude of the eects is, however, quantitatively smaller, reaching only 10 percent of the typical dierences in relative shares within a given country pair, which is not surprising considering the larger variability of bilateral trade shares.

There is also a positive relation between the natural hedge provided by a commodity's price movements and the growth rate of its total and bilateral export shares during the sample period. This relation can also explain about 10 percent of the typical dierences in export shares growth. More importantly, when using the specication in growth rates to compute the long run impact of changes in natural hedge, the estimated coecient is twice as large as when directly estimating the specication in levels, and accounts for a similarly larger share of dierences in relative shares. In addition, similar results are obtained when comparing the role of natural hedging across exchange rate regimes instead of using an ex-post measure of exchange rate volatility. A commodity's natural hedge is related to its importance in a country's commodity basket mainly during exible exchange rate regime periods. A series of robustness tests show that these results are not crucially driven by specic measures, countries, or commodities.

Somewhat surprisingly, the results show that the importance of a natural hedge against exchangerate uctuations is not clearly related to the availability of formal hedging instruments. Only when looking at the growth of export shares I nd that a well developed market for foreign exchange rate derivatives weakens the relation between a commodity price's correlation with the country's exchange rate and its importance in the country's export basket in high exchange rate volatility environments. When looking directly at the composition of trade (in levels), the relation between the development of foreign exchange rate derivatives and the importance of natural share reverses. This is consistent with evidence by Wei (1999) that the availability of hedging instruments does not aect the relation between exchange rate volatility and trade. Broader measures of the development of nancial markets do not seem to have such an eect on the importance of a natural hedge for export composition, suggesting that the relevant dimension of nancial development for this mechanism, if any, is the widespread availability of exchange rate derivatives.

This paper relates to several strands of literature. First and most directly, it relates to the literature on the real eects of exchange rate volatility and exchange rate regimes (see, Frankel and Wei (1993), Frankel and Rose (2002), Rose (2000), Rose and Van Wincoop (2001), Clark et al. (2004),Klein and Shambaugh (2006), and Tenreyro (2007), among others; Clark et al. (2004) and McKenzie (1999) also provide comprehensive surveys of the pre- and post- gravity equation literature, respectively). It contributes to this literature by emphasizing the heterogeneity of the impact of exchange rate risk across industries and by focusing on its consequences for the composition 3