Transitory or Permanent Exchange Rate Changes: An Important Distinction in Risk Management

After the breakdown of the fixed exchange rate system in the early 1970 the debate about the appropriate measurement and management of exchange rate risk has been nearly continuous. Increased turbulence in the world economy during the same period made the issue more urgent . It may seem surprising that a consensus about exchange risk management has not developed. However, disagreement about this issue can be explained by the absence of a consensus about exchange rate determination and the functioning of world financial markets.