| Consider the following statement regarding the foreign exchange. |
| 1. In 1971, the Bretton Woods system of administering fixed foreign exchange rates was abolished in favour of market-determination of foreign exchange rates; a regime of fluctuating exchange rates was introduced. |
| 2. Besides market determined fluctuations, there was a lot of volatility in other markets around the world owing to increased inflation and the oil shock. |
| 3. The exchange rates were deregulated and were allowed to be determined by markets in 1933. |
| Which of the statements given above are correct? |
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) All of these
Correct Answer: A
Solution :
[d] In 1971, the Bretton Woods system of administering fixed foreign exchange rates was abolished in favour of market-determination of foreign exchange rates; a regime of fluctuating exchange rates was introduced. Besides market determined fluctuations, there was a lot of volatility in other markets around the world owing to increased inflation and the oil shock. Corporates struggled to cope with the uncertainty in profits, cash flows and future costs. It was then that financial derivative-foreign currency, interest rate and commodity derivatives emerged as means of managing risks facing corporations. In India, exchange rates were deregulated and were allowed to be determined by markets in 1933. The economic liberalisation of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange.
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