Abstract: With the observations that many firms in supply chains usually import inputs from their upstream foreign partners and sell their output both to domestic markets and to foreign markets, thus it is assumed that those focal firms are faced with both import and export exchange rate risks (i.e., two-sided exchange rate risks). To capture this observation, a supply chain game model is built and how those exchange rate risks are transmitted in the supply chain is examined. The supply chain consists of a foreign supplier, a manufacturer (the focal firm), a domestic retailer and a foreign retailer in a country that is different from that the supplier is operated in. The supply chain is operated under wholesale price contracts. The risk transmission is captured by how the variances of those two exchange rate volatilities affect the operations of the supply chain and the corresponding performance outcomes according to the approach of comparative static analysis. More specifically, with equilibrium results, it is showed that when those two-sided exchange rate volatilities are negatively correlated, (1)an increase in the variance of the import (export) exchange rate volatility leads to higher variances of the wholesale prices that the manufacturer offers to the supplier and the foreign retailer, the quantities that the manufacturer buys from the supplier and sells to the foreign retailer, the profits of the supplier, the manufacturer and the foreign retailer, and higher levels of expected profits of these three supply chain members; and (2) the variances of the wholesale price and the quantity that the manufacturer offers to the domestic retailer, the domestic retailer's expected profits and the corresponding variances all decrease for lower levels of the import (export) exchange rate volatility and increase for higher levels, implying a U-shaped risk transmission.On the other hand, when those two-sided exchange rate volatilities are positively correlated, (3) the variances of the wholesale prices that the manufacturer offers to the supplier and the foreign retailer, the quantities that the manufacturer sells to the foreign retailer and buys from the supplier,the profits of the supplier, the manufacturer and the foreign retailer, and the expected profits of these three supply chain members,all decrease for lower levels of the import (export) exchange rate volatility and increase for higher levels, implying a U-shaped risk transmission;(4) an increase in the variance of the import (export) exchange rate volatility results in higher variances of the wholesale prices and the quantity thatthe manufacturer offers to the domestic retailer and a higher expected profit with a corresponding higher variance for the domestic retailer.These results theoretically explore how two-sided exchange rate risks in terms of variances are transmitted in supply chains and highlight the key role of the correlation structure in two-sided exchange rate risk transmissions.

Key words: two-side exchange rate, exchange rate volatility, correlation, risk transmission