Exchange rate risks in trade and investment between South Africa and the developed countries

Abstract

The current international monetary system is very different from that of a few decades ago. Many of the old restrictions that had been placed on currency and capital movements between countries have fallen away in favour of a much more liberal international payment and investment system. The global financial arena is now characterized by greater currency instability, volatility and heightened financial risks. Exchange Rate risk is one of the complex topics in the economic world. Since there are so many factors in the financial market that influence a country's currency value, it becomes very risky for importers, exporters and portfolio investors to be involved in the international trade and financial markets. The purpose of this study is to gain an understanding on how the major economic indicators have an impact on the decision-making of the importers, the exporters and investors, to further influence the volatility of the Rand; and to provide various hedging and arbitraging strategies to reduce foreign exchange rate risks. The layout of the study is based on six chapters. Chapter 1 focuses on the background and scope of the study, mainly explaining the reasons, objectives and methodology of this study. An historical overview takes place in chapter 2, where a number of different exchange rate systems will be discussed. Chapter 3 reviews different exchange rate theories in order to support the empirical study in the next chapter. Chapter 4 focuses on an investigation and comparative study on how foreign investments and trade with developed countries have an impact on currency values and visa-versa. A number of management strategies for reducing exchange rate risks are introduced in chapter 5. Chapter 6 is the summary and conclusion of the research.