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futures contracts are the oldest form of derivatives and are the most common form of hedging technique. Options are contract that give the owner the right but not the risk to buy or sell an asset. Swaps are the latest addition to the class of financial derivatives. Swaps are contracts to exchange cash flows or other rights or a stream of future payments based on the underlying value of currencies/exchange rate, bonds/interest rates, commodities, stocks or other assets.

In Mauritius the derivatives market is still at its initial development stage. Hedging against foreign exchange risk through financial instruments is possible only for big companies since it is very costly. Government must implement the adequate policies and provide the initiatives for the development of the derivatives market in Mauritius. The latest development in the derivatives sector is the implementation of a new derivatives(commodity and currency futures) exchange in Mauritius. This exchange will be Africa's 1st international multi-asset derivatives.

The Commodity Exchange should allow different and categories of participants from within Mauritius and abroad to trade through an electronic platform linking geographically dispersed buyers and sellers in real time. The promoters of GBOT expect that the Commodity Exchange based in Mauritius will help accelerate the integration of the African sub-continent with the world economy by leveraging the strategic location of Mauritius between the time zones of New York, London, and Tokyo and will boost the image of Mauritius as a globally-integrated, leading financial centre in the region. The Exchange will facilitate links between commodity markets in Africa and global trading hubs, in accordance with principles of price transparency, trade efficiency, risk hedging and structured finance to the interiors of the region.

Hooper and Kohlhagen(1978) concluded that the effect of exchange rate volatility on trade is ambiguous and depending on the relative degree of risk aversion of exporters and importers and their degree of risk exposure, which in turn depends on the invoicing currency and the extent of forward cover.

Hence if firms in Mauritis are risk neutral, volatility of exchange rate will not impact on their decisions to import and exports. Moreover firms have the possibility to pass on increases in exchange rate in their prices. If demand for exports or imports is inelastic, then increases in prices of exports and imports should not have any effect on their quantity demanded. However passing on any unfavourable change in exchange rate in the prices charged might not be the appropriate solution since when competing in international market, remaining competitive in terms of prices is essential as otherwise firms may be driven out of competition.

In addition, while our empirical study showed that exchange rate volatility does not significantly affect the volume of trade, the results confirmed that an appreciation or depreciation of the real exchange rate contribute to the improvement or deterioration of trade both in the long run and in the short run. In other words, real depreciations were found to have a positive impact on volume of exports and a negative impact on volume of imports. These results are consistent to the findings of authors like Warner and Kreinin(1983), Himarios(1989) and Kale(2001). Hence firms dealing th