TABLE
OF CONTENTS
Title
Page
Certification
Dedication
Acknowledgement
Contents
CHAPTER ONE
1.0 Introduction
1.1 Background
of the Study
1.2 Statement
of the Study
1.3 Justification
of the Study
1.4 Objective
of the Study
1.5 Research
Questions
1.6 Statement
of Hypothesis
1.7 Scope
and Limitation of the Study
1.8 Organization
of the study
1.9 Definition
of terms
CHAPTER TWO
2.1 introduction
Literature review
2.2 The
foreign exchange rate
2.3 The
foreign exchange risk.
2.4 The
foreign risk management.
2.5 Foreign exchange market.
2.6 National monetary policies $ exchange rate.
2.7 Exchange rate determination.
2.71 The balance payment approach.
2.7.2 Purchasing power party (ppp).
2.8 The Nigerian economy – am1 over view.
2.8.1 Structure of the foreign exchange market
2.8.2 The auction and the inter – bank market.
2.8.3 The bureaux de change.
2.8.4 Pricing
methodology and exchange rate moments.
2.9 Government policies on foreign exchange.
2.9.1 Policy strategies
2.9.2 Historical briefing of united bank for Africa
plc.
CHAPTER THREE
3.1 Research
methodology introduction
3.2 Research
Design
3.3 Type
and sources of data
3.4 Sample
size of the study
3.5 Sampling
technique
3.6 Instrumentation
3.7 Method
of data analysis.
CHAPTER FOUR
4.1 Data
Presentation Analysis & Interpretation, Introduction
4.2 Data
Analysis
4.3 Restatement
of Research Hypothesis
4.3.1 Testing
of Research Hypothesis
4.4 Impact
of Exchange Rate and Control
4.5 Observed
Responses for Hypothesis
4.6 Foreign
Exchange Policy
CHAPTER FIVE
5.1 Summary
of Findings
5.2 Conclusion.
5.3 Research
recommendation
5.4 Limitation
of the study
5.5 Suggestion
for future studies
5.6 References
CHAPTER ONE
1.0 INTRODUCTION
BACKGROUND OF THE STUDY
International trade and capital flow
require a Foreign exchange market because, despite increased economic
interdependence in the world, each country maintain it’s own National medium of
exchange the official foreign exchange market in Nigeria is made up to the
federal ministry of finance and the central bank of Nigeria as the apex
institution, authorized dealers including commercial and merchant bank,
development banks and bureau de exchange control policies and procedures while
the banking system armed bureau de exchange serve as channels for implementing
official policy. Operating side by side with the official foreign exchange
market is the parallel or black market (Agene 1991).
Since
1985, the central bank of Nigeria (C.B.N) has attempt to enviable an optional
exchange rate for the local currency at the same time sought to achieve a
system that preferentially allocates the available foreign exchange to the
productive sectors, that is agriculture and manufacturing.
It
has been reluctant to allow the inter-play of the forces of demand and supply
to determine of exchange rate and allocation of scarce foreign exchange
resources. They consequently has being maintained of huge subsidy on the
official foreign exchange .this subsidy combine with the private bidding system
has created severe pressure on the domestic money market, as over N35 billion
is subsidized foreign exchange in 1985.however, against the background that
foreign exchange market (FEM) was faced with problem, the federal government of
Nigeria (FGN) took two economic measure with more favorable exchange rate for
foreign currencies in terms of naira, holder of hard foreign currencies would
repatriate them back into Nigeria to benefit from the favorable rates now operating which earlier was
possible only through black market rate. This official channels are more to
benefit from a net inflow of funds hold by Nigerians abroad. The external value
of the naira is a fundamental value and one established, all other value in the
economy would take their correct shape and deduce distortions are divergence
from optimists once corrected, optional allocation resources would be advised.
THE FOREIGN EXCHANGE RATE
Exchange rate are functions of
international economic activities. It is the quantitative expression of a
country’s currency in term of two naira, fifty kobo (Adidlanye 1984).
Thus,
foreign exchange rate is the rate of exchange on foreign currencies or simply
the price of one country ‘s quoted in terms of another. That is the rate of
exchange in London
is the price here in dollars of a pound sterling draft the basic rate of
exchange is generally quoted as the price of a cable transfer. It is argued
that will adequate downward adjustment of exchange rates, countries with
balance of payments difficulties would be able to export more, less and save
some foreign exchange of declaring the national economic emergency.
In October 1985 an adopted structural
adjustment programme (SAP) in July 1986.tthe programme gave birth the second tier
foreign exchange market (SFEM), this legislation exchange regime in Nigeria
since independence in terms of the dismantling of the restrictions and
bureaucracies which plagued previous regime (Agene 1991).
Structural adjustment programme (SAP)
refers to a set of comprehensive economic reform measure designed to correct in
balance in the economic arising from unfavorable external factors as ell as
inappropriate domestic policies. The objectives of (SAP) was to effectively
restructured the criminate price distortions and heavy foreign exchange earner
and import of consumption and produced goods. The major thrust or structural
adjustment programmes (SAP) include the following:
a. Achieve
fiscal and balance of payment viable over the period.
b. Restructuring
and diversify the productive base of the economy in other to reduce dependency
on a single major foreign exchange earner and importer.
c. Lay
the basic for a sustainable non –inflationary economic growth.
d. Lesson
the dominance of unproductive investment in the public sector efficiency and
encourage the growth potentials of the private sector.
The
over –valued naira led to a flight of capital, it thus aided that naira was converted
to harder currencies at rates that decided to give more value to the naira than
it was worth now in the regime of foreign market (FEM) and banking business
carried on in Nigeria in
1949
by the British and the French bank limited, and has a legendary and enviable pedigree
as the bank for wise man and woman with strong representative in the corporate
and wholesales market. UBA also has a large and established retail franchise
and two foreign branches in New York and grand Cayman Island.
UBA Group is known for its initiative and
creativity. Some of the key milestone in it’s history includes ;
i.
First among international to be registered
under Nigeria
laws.
ii.
First Nigeria bank to offer it’s share to the
public following it’s listing on the
Nigerian stock exchange in 1970.
iii.
First
Nigeria bank to introduce a cheque guarantees scheme known as UBA CARD in 1986.
iv.
Won the Euro money 2000 award for excellence,
as the best domestic bank in Nigeria.
v.
First Nigeria bank / company to gain
recognition of the
international
financial community through the establishment of Global depository receipt
(GOR) programme.
vi.
Consistent and solid financial performance over
the past year.
THE FOREIGN EXCHANGE RISK
Risk
can been seen as unforeseen contingency. It is the chance that the actual
return on an investment will be different from its expected return. Exchange
risk is the effect that unanticipated exchange rate changes have on the value
of the firm loan and thus, it is simply in concept a potential gain or loss
that occur as result of an exchange. for example, if an individual owns a share
in the Hitachi,
the Japanese company he or she will lose if the value of the yen drops.
FOREIGN EXCHANGE RISK MANAGEMENT
Many firms retrain from active
management of their foreign exchange exposure, even through they understand
that exchange fluctuations can affect their earnings and value.
(Jan
and Gonter 2003) one of the reasons for taking this decision is that management
tools, such as forwards futures and options as speculative. Perhaps they are
right to fear a bosses of hedging techniques, but refusing to use forward and
other instrument s may expose the firm o substantial speculative risk.
THE FOREIGN EXCHANGE MARKET
The foreign exchange market for any
currency is made up of all financial centres in the world were the currency is
traded for the currencies. Both individuals and firms buy and sell foreign
currencies from banks and brokers in these financial centre abroad (odizi
1994). The financial centres of the world with their foreign exchange markets
are closely linked together by means of modern telecommunication facilities.
According to agene (1991), the
official foreign exchange market in Nigeria
is made up of the central Bank of Nigeria and the federal ministry of
finance as the apex institution authorized dealers including commercial and
merchant banks, development bank and the bureau die change.
NATIONAL MONETARY POLICIES AND EXCHANGE
RATE
The monetary policies followed in
different countries can be grouped by the rates targets followed by their
central bank authorities in determine the rates target (odizi, 1994). Some
countries have persuade dependent monetary policies change in their domestic
money supplies are geared to changes in their central bank holdings of
international moneys. The domestic money supply increase when the central bank
purchase foreign exchange from exports by issuing more domestic monetary
liabilities, its domestic monetary liabilities decline when importers money,
the constant as
long
as its holding of international money are constant.
EXCHANGE RATE DETERMINATION
If market participants constantly
contrast the options of holding an exchange position in a given currency with
the option of covering it, then in equilibrium the returns from the options
should be similar. If exchange position remains open, its returns is equal to
the interest rate earned in the currency plus the percentage changes in the
spot rate during the holding period. If the position is covered the return is
equal to the interest rate in the currency plus the forward premium or discount
on the currency.
THE NIGERIAN ECONOMY – AN OVERVIEW
The foreign exchange market (FEM)
became an institution Nigeria
following protracted economic declines. The 1970’s were generally regarded as
an era of Oil boom in Nigeria, when oil revenue enhanced economic development
the economy become heavily dependent on crude petroleum exports as the main
source of foreign exchange earnings and the government revenue (NEEkop, 1992).
According to the CBN international operation (2003) the increased exports of
crude oil in the early 70’s following he sharp rise in its prices enhanced official foreign
exchange receipts. The Larger inflow of oil money encouraged large scale
importation of consumer and producer by 1980’s and in the process became a
major food importer.
GOVERNMENT POLICIES OF FOREIGN EXCHANGE
A number of policy instrument were
adopted at the inception of (SAP) and in the process of programme
implementation to attain their objectives one of the inception for boosting export
receipt and diversity the export base was the abolition of the commodity boards
and the export licensing more people to export.
However companies which failed to
repatriate export process as required are penalized through cart ailment of
their use of other foreign exchange facilities some institutional facilities
were introduced to support the export drive – ages of the newly established National
Maritime Authority based on a 40-40-20 formula
allowing
Nigeria
vessel of life 40% of the value of trade while trading partners and third party
vessels to lift 40% and 20% respectively.
HISTORICAL BRZEFING OF UNITED BANK FOR
AFRICA PLC
The consolidated United Bank for Africa
plc, is the product of a merger of Nigeria’s third and fifth largest
banks.
U.B.A and standard trust Bank plc
respectively and continental Trust Bank. The union is the first successful
merger transaction in the history of the Nigerian banking sector and was born
out of a desire to lead the sector to a new era of global relevance by
championing the creation of the Nigerian consumer finance market
and
lending a private/public sector partnership aimed at accelerating the economic
development of Nigeria.
The old UBA had been one of the three
largest banks that have historically dominated the banking industry in Nigeria, along
side first bank plc and union bank plc and were owned by a board spectrum of
local and international private and institutional investors including Banque
Nationa delavoro and monte pasehi di seba
1.1 BACKGROUND OF THE STUDY
International
Trade and capital flows required a foreign exchange market because despite
increased economic interdependence in the world, each country maintains its own
national medium of exchange the official foreign exchange market in Nigeria is
made up to the federal ministry of finance and the centre Bank of Nigeria as
the Apex institution authorized dealers including commercial and merchant bank,
development banks and bureau de change. The federal ministry of finance and the
central Bank of Nigeria
are jointly responsible for the formulation of exchange control policies and
procedures while the banking system and bureau de change serve as channels for implementing official policy. Operating
side by side with the official foreign exchange market is the parallel or “Black
market (Agene, 1991).
Since 1985, the central bank of
Nigeria (CBN) has attempted to evolve an optional exchange rate for local
currency at the same time sought to achieve a system that preferentially
allocates the available foreign exchange to the productive sectors that is agriculture
and manufacturing. It has been reluctant to allow the inter-play of forces of
demand & supply to determine of exchange rate and allocation of scarce
foreign exchange resources. They consequently has been maintain of huge subsidy
on the domestic official foreign exchange, this subsidy combined with the
private biding system has created severe pressure on the domestic money market,
as over N35 billion is subsidized foreign exchange in 1955. However, against
the background that foreign” exchange market (FEM) was faced with problem, the
federal government of Nigeria (FGN) took two economic measure of declaring the national economic emergency in October
1985 and adopted structural Adjustment Programme (SAP) in July 1986. The
programme gave birth the second tier foreign Exchange market (SFEM), this
legislation exchange regime in Nigeria
since independence in terms of the dismantling of the restrictions and
bureaucracies which plagued previous regime (Ayene, 1991).
Structural adjustment programme (SAP) refers to a set of comprehensive economic reform
measure designed to correct imbalance in the economy arising from unfavourable
external factors as well as in appropriate domestic policies. The objectives of
(SAP) was to effectively restructure the consumption and production pattern of
the Nigeria
economy to eliminate price distortions and heary foreign exchange earner and
imports of consumption and producer goods. The major thrust of structural
Adjustment programme (SAP) includes the followings:
Allocation resources would be
achieved.
1.2
STATEMENT
OF THE PROBLEM
The
bretton woods conference (1944) established a fixed exchanged rate system where
by each currency had a fixed parity (value) in relation to the dollar. In Nigeria, the
manufacturing or better still corporate sector depended heavily on imported raw
materials, machineries, spare parts and services however foreign exchange did
not pose any problem then simply because of the exchange rate.
However,
with deregulation of the foreign exchange market, this has resulted in high
foreign exchange rate. Research in the past have neglected some specific issues
that are capable of up-setting the whole economic system, one such issue and to
which this research will address in the impact of foreign exchange policy on
the Nigeria corporate sector depend on foreign input for their production.
1.3
JUSTIFICATION
OF THE STUDY
Monetary
authorities, authorized dealers in the foreign
exchange
market, market analysts, and professionals in both the private sectors of the
nations economy agree that effective foreign exchange management serve the need
to promote a given pattern of development, protect local industries prevent
(A) Achieve
fiscal and balance of payment viable over the period.
(B) Restructuring
and diversify the productive base of the economy in order to reduce dependence
on a single major foreign exchange earner and imports.
(C) Lay
the basic for a sustainable non-inflationary economic growth.
(D) Lesson
the dominance of unproductive investment in the public sector, efficiency and
encourage the growth potentials of the private sector.
The
over-valued naira led to a flight of capital, it thus aided that naira was
converted to harder currencies at rates that tended to give more value to the
naira than it worth. Now in the regime of foreign market (FEM) and with more favourable
exchange rate for foreign currencies would repatriate them back into Nigeria to
benefit from the favourable rates now operating which earlier was possible only
through black market rates, thus official channels are more to benefit from a
net inflow of founds held by Nigerians abroad. The external value of naira is a
fundamental value and one established, all other value in the economy since
distortion are divergence from optimality once corrected, optional capital
flight, promote insurance and stimulate re insurance transactions (Obisesan,
2002)
The
importance of foreign exchange
management to economic growth development and welfare cannot be over
emphasized, as such a proper research work has been carried on the Nigeria
foreign exchange market.
The
importance of foreign exchange market (FEM) and corporation performance in Nigeria is to
checkmate the foreign exchanged malpractices. This achievement is as follows:
To
provide the mechanism for dealing in foreign exchange at market determined
rates and ultiustely achieved simple equilibrium rates for naira.
Another
is to enable Nigeria
complete effectively with the financial centre for funds to finance industrial
growth and development. To attract inflow of capital especially funds held
abroad by Nigeria,
to eliminate the illegal traffics in currency and commodity across the
country’s boarders, to achieve the convertibility of the naira and even the
optimal allocation of resources.
1.4
OBJECTIVES
OF THE STUDY
This
research work focused on the risk associated with fluctuation in foreign
exchange rates and its effect on the
performance
of corporate organization in Nigeria.
The
specific objectives of the study are as follows;
I)
To examine the risk fluctuation in exchange
rates and control associated with currency management in a multi-currency
settings.
II)
To investigate on the policies one government
and corporation organization have and how effective this policies have been.
III)
To
appraise the impact of the policy tools on the growth and development of the
nations economy.
IV)
To prefer recommendation based on the research
findings.
1.5
RESEARCH
QUESTIONS
I)
Does the various exchange policies help your organization
in it’s corporate performance?
II)
Does fluctuation in the foreign exchange rate
affect your net income?
III)
Does profitability of your organization depends
on the difference between the naira and the other major current?
IV)
Do you feel the impact of competition in the
faces of those developments.
V)
Does your unit cost fluctuate
1.6
STATEMENT
OF HYPOTHESIS
Based
on the research questions and objectives
of the study, the following hypothesis stated
will be tested.
Hypothesis 1
H0 –
Change in exchange rate and control have on dramatic impact on profitability.
H1 –
Changes in exchange rate and control have dramatic impact on profitability.
HYPOTHESIS
2
H0 –
Variation in holding of currency is not determine by the manager
H1 –
Fluctuating exchange rate control is not determined by the manager.
HYPOTHESIS 3
H0 –
Fluctuating exchange rate control does not associate with management of
currency in multi-currency setting.
H1 –
Fluctuating exchange rate control associate with management of currency in
multi-currency setting.
1.7
SCOPE
AND LIMITATION OF THE STUDY
It
is essentially important important on state that the study focused on the
general appraisal of the foreign exchange policy in Nigeria as this involve an
assessment of how the objective have been realized and the attendants respect
of the policy.
The
research will be in historical and case-study research which may be limited by
insufficient finance, lack of enough time, lack of co-operation from the
respondent and the case study. This may hinder thorough research.
However,
efforts will be made to ensure that the above constraints and limitations do
not affect the effective completion of the research work. The time frame and
resource of the study.
Our
study will only cover a selected number of corporate organizations with high
off-shore activities ranging between the
year 1986 – 2005.
1.8
ORGANIZATION
The
organization of the right from chapter one comprises the introduction which is
sub-divided into eight sub-sections as follows: back ground of the study
statement of the problem, justification of the study objective of the study
statement of research questions,
statement
of hypothesis and scope of the study. While chapter two dealt with the
literature review. The third chapter deal with research methodology and the
forth chapter deals with Data Analysis and presentation while the last chapter
comprises of the summery conclusion and
recommendation.
1.9
DEFINITION
OF THE TERMS
Exchange
Control: a mechanism by which a country scalesite harness it’s foreign exchange
resources and rationalization for the settlement international indebtedness
while ensuring their same favourable development of domestic economic
activities without diminishing the value of it’s currency (Nwa ractie 1982).
Exchange
Rate: the limit price of a currency in terms of currency of another country.
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