Main objective of this thesis is to analyze the effect of exchange rate volatility and different exchange rate regimes on international trade. Through use of a panel data including US trade with large number of countries and fixed effects estimation methods significant negative effect of exchange rate volatility on trade is found, but this effect is not unambiguous. I find larger effect of exchange rate regimes on US imports compared to exports. CEU eTD Collection ii Acknowledgments I am very thankful to my academic supervisor, Professor Miklós Koren, for his valuable comments and recommendations which helped me in developing my approach to the topic. I want to thank Yulia for her patience, support, help and love throughout the thesis process. Special thanks to Mammad Babayev for entertaining me during the sleepless nights and providing insights that guided and challenged my thinking.

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Since the inception of floating exchange rates, firms engaged in international operations have been highly interested in developing ways to protect themselves from exchange rate risk. Since price (or exchange rate) uncertainty results in a reduction of production and exports, the main role attached to financial markets which allow firms to reduce price (or currency) risks lies in. their impact on production and export level. In recent years we witness a growing body of literature dealing with optimal hedging by firms facing price or exchange rate uncertainty (see, for example, Feder, Just, and Schmitz (1980), Anderson and Danthine (1981), and Kawai and Zilcha (1986)).

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