1.1 Background of the Study
Exchange rate fluctuations have been of serious concern to the monetary authorities, policy makers and business tycoons of developing countries, Nigeria inclusive because of the relevance of exchange rate in international trade, investment and in determining the level of output growth of a country. The movement of goods and services across national frontiers in one direction involves the movement of foreign exchange in the opposite direction. This creates the needs for a rate of exchange between the currencies of two trading partners to settle indebtedness arising from trade involving them (Nzotta, 2004).Exchange rate is a price at which a currency is regulated in the market, which varies at one time or the other. In other words, it links domestic prices with international prices. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position. Paul (1996) defines balance of payments as an accounting record to all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services and financial capital, as well as financial transfer. It summarizes the international transaction for a specific period usually one year and is prepared in single currency for the country concerned. Consequently, nations in the pursuit of the macroeconomic goals of healthy external balances as reflected in their balance of payments (BOP) position, find it imperative to enunciate an exchange rate policy.