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:

1. Achieve fiscal and balance of payment viable over the period.
2. Restructuring and diversify the productive base of the economy in other to reduce dependency on a single major foreign exchange earner and importer.
3. Lay the basic for a sustainable non –inflationary economic growth.
4. 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 ;

1. First among international to be registered under Nigeria laws.
2. First Nigeria bank to offer it’s share to the public following it’s listing on the Nigerian stock exchange in 1970.

• First Nigeria bank to introduce a cheque guarantees scheme known as UBA CARD in 1986.

1. Won the Euro money 2000 award for excellence, as the best domestic bank in Nigeria.
2. First Nigeria bank / company to gain recognition of the

international financial community through the establishment of Global depository receipt (GOR) programme.

1. 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.