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the expected positive sign. Inflation was shown to have a negative effect on volume of trade but the effect was less important. Foreign capacity utilisation was found to be insignificant in the long run. In the short run private investment and inflation lost their significance while foreign capacity utilisation was found to have a negative and significant effect on exports volume.

As for imports, real domestic income and real exchange rate were the variables that had the largest effect on volume of imports. Foreign income had a positive sign and while real exchange rate had the negative sign which are in line with most theoretical and empirical literature. Inflation rate had a positive effect on imports. In the short run however only real exchange rate was significant.

5.2 政策的影响和建议——5.2 Policy implications and recommendations

The main finding of this paper is that exchange rate volatility does not have any significant impact on trade flows. These results are in line to those obtained by Akhtar and Hilton, Hooper and Kohlhagen(1978), Bahmani et al.(1993), Bailey et al.(1986) who dounf evidence of a negative but insignificant relationship between exchange rate volatility and trade. The insigficance of this relationship may be due to the fact that Mauritius has a manage float exchange rate regime which prevents wide fluctuations in the exchange rates. Hence the level of exchange rate volatility may be quite low in Mauritius and hence may not be a major concern for firms engaging in international trade. However government should still adopt and implement policies for stabilisation of the exchange rate market. This is because in this era of globalisation, countries are moving towards liberalisation of trade. Mauritius is member of the World Trade Organisation whose main aims is the elimination of trade barriers. Mauritius may eventually remove exchange rate controls by government and adopt a system of freely floating exchange rate. If sound macroeconomic policies are not adopted, this may lead to wide fluctuations in the exchange rate markets which would constitute a high level of foreign exchange risks to firms.

In addition, firms must have the opportunity to hedge against foreign exchange risks. Ethier and Baron(1973a) concluded that with perfect forward markets and no other sources of uncertainty but the exchange rate, the volume of trade is unaffected by exchange rate volatility.

Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. While firms may adopt internal risk management techniques to protect themselves again such risks, there are also external risk management techniques. There has been much advancement in the financial sector with regards to management of risk with regards the development of new financial instrument which involves the use of derivatives. Financial derivatives are financial instruments whose values are determined by an underlying financial instrument or indicator or commodity. The three major classes of derivatives include forwards or futures contract, options and swaps. Futures contract are contracts to buy or sell a specified asset, at a specified price, before or on a specified date. Forward/