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MEANING AND NATURE OF EXCHANGE RATES : During the Great Depression of the 1930s, almost all countries found it difficult to increase their exports. Many of them decided to resort to repetitive devaluation of their currencies. Devaluation means lowering the value of its currency by a country in ten of other currencies. By doing so, a country attempts to make its goods cheaper in foreign markets thus encouraging its exports. On the other hand, foreign goods are made expensive in the domestic markets which tend to discourage imports. One of the objectives of the International Monetary Fund established in 1947, was to "promote exchange stability, to maintain orderly exchange arrangements among members end to avoid competitive exchange depreciation". Thus it was envisaged that the exchange rates of various currencies would remain more or less stable. Under the provisions of the IMF, every country was required to declare the par value of its currency in terms of gold or dollars. Gold was valued at $35 per ounce, the country was supposed to maintain the value of its currency within a margin of ± 1% of the par value. Thus the foreign exchange risk, -if any, was limited and the problem was not serious. After August 1971, this margin was increased to ± 2.25 per cent and by March 1973, the system of fixed par values was virtually given up. And at present, the value of the major currencies continues to fluctuate with the result that the problem of foreign exchange risk has assumed serious proportions. An idea of the fluctuations in par values can be had from the following examples: The value of the rupee to a US dollar was Rs.9.14 in 1976, Rs.8 in 1980, Rs.12.50 in 1985 and Rs.36.35 in 1997. The wider the fluctuations in exchange rates, the more are the risk involved.
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