The Exchange Rate Mechanism (ERM):
Currencies in the ERM had fixed central rates against each other and against the ECU, a composite European currency, but a variation margin around the central rate was permitted before central government intervention was required.
However, exchange rate stability cannot be maintained in the long term when the economy of one or more of the countries is weak. A Government can raise interest rates to sustain the value of its currency, but only for a limited period without further damaging the economy.
Thus several attempts were made to maintain exchange rate stability, but all had a temporary success.
Therefore it can be concluded that Currency risk in an inevitable feature of international trade and finance. However, individual companies can take measures to avoid or reduce their own exposures to risk, i.e. to Hedge their exposures, provided they know what exposures they face and how large they could be.
Currencies in the ERM had fixed central rates against each other and against the ECU, a composite European currency, but a variation margin around the central rate was permitted before central government intervention was required.
However, exchange rate stability cannot be maintained in the long term when the economy of one or more of the countries is weak. A Government can raise interest rates to sustain the value of its currency, but only for a limited period without further damaging the economy.
Thus several attempts were made to maintain exchange rate stability, but all had a temporary success.
Therefore it can be concluded that Currency risk in an inevitable feature of international trade and finance. However, individual companies can take measures to avoid or reduce their own exposures to risk, i.e. to Hedge their exposures, provided they know what exposures they face and how large they could be.