| dc.description.abstract | The use of the exchange rate in the regulation of a
country's international payments is by no means a recent
occurrence. Official control over the pricing of currencies
has been traced as far back as the 16th Century in Europe. At
this early age the main reason for control was to maintain
the wealth of citi7.ens who.held foreign assets. Since
then, the exchange rate has gradually taken on a more
important role as one of the main regulators of international
economic relations. The use of the exchange rate in this
respect has, however, not been without opposition. With the
improvement in knowledge regarding the operation of the economy,
critics have questioned the efficacy of the exchange rate as a
monetary tool. The debate on this very contentious subject
has continued to the present day. This project is an attempt
to understand the subject in the Kenyan context.
Section 1 surveys the exist:ing theories on the
deterrnination of exchange rates under: the floating system
together with an analysis of the role played by the state in
determination of exchange rates in Kenya. Section 2 critically
evaluates t0e efficacy of the exchange rate as a regulatory
tool in economics. The findings indicate no strong link as
yet between changes in the exchange rate and changes in the
balance of trade or payments. Further on, a conventional
approach is adopted to show the effect of devaluation on the
balance of payments. In the closing stages of the section,
alternative strategies for management of the balance of
payments without devaluation are proposed.
Section 3 explores the subject of exchange risk as it
relates to firms. Seven case studies are presented of firms
whose operations have in one way or another been affected by
exchange rate changes. In line with this, proposal s in
respect of accounting for foreign exchange items are given
in this section. The latter could form the basis of a future
Kenyan Accounting Standard on the subject. At the end of
this section, the tax implications of exchange rate changes are
explored. Section 4 deals with the very Imporant area of
exchange risk management. It is imperative that company
managers enter into arrangements that reduce or eliminate
exchange risk if they are to avoid constant fluctuations
(mostly downwards) in their profits. Two alternative
strategies are presented in this regard. | en |
