CHAPTER ONE

INTRODUCTION

1.1   Background to study

Foreign exchanges’ importance will be difficult to overstate in respect to the world economy. Profitability can be affected positively or negatively by foreign exchange. The risk and returns of various assets affect international capital flows. The major focus for the policymakers, the public and certainly the media is the rate of exchange. Nigeria today as a nation is faced with the very big challenge of minimizing import dependence and maximizing an export led-growth policy. Globally the day to day turnover of foreign exchange transactions in all currencies increased from about USD600 BILLION IN 1998 to about USD1.4 trillion (1,400 billion) in 1998 and later decreased to about USD1.2 trillion in 2001. The reason for the decline primarily was for the forex market involving consolidation of players. Unlike globally, Effects of exchange rate fluctuation in developing countries like Nigeria has received considerable attention and generated much debate. The debate concentrates on the degree of changes in the exchange rate had generated internal and external impact that is sudden in Nigerian Economy. Exchange rate of a country per-takes in an important role in international economic transactions due to the fact that no nation can remain in self-sufficiency due to varying factor gift. Onotaniyohuwo & Oladipupo (2011) States that movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. These facts underscore the importance of exchange rate to the economic well-being of every country that opens its doors to international trade in goods and services. The importance of exchange rate derives from the fact that it connects the price systems of two different countries making it possible for international trade to make straight comparison of traded goods. In other words, it links local prices with international prices. (Opaluwa, 2010) Opines that following the changes of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate changing has become a topical issue in Nigeria Nestle plc is a multinational manufacturing company, focused on the manufacturing, marketing and distribution of cereals, beverages, confectionery and table water. Nestle plc is a well-regarded and trustworthy nutrition, health and wellness company famous world-wide for its high quality products. Exchange rate experience has in many ways differed from what was anticipated in 1973 when the countries that are majorly industrialized abandoned the struggle to keep the values of their currencies fixed. There is an elaborate feeling that exchange rate is currently more volatile than what it is expected to be, than they should be and perhaps what they need to be (Frankel 1995).  The exchange vitality creates a unique problem for business activities performed internationally (exporting and importing) because it brings about a type of risk (foreign exchange risk).  When business deals are organised for future, they are complicated by the changes in the high risk of exchange rate (Evans, Taylor, & Holzman, 1985).This exchange rate changes is definitely going to have an impact negatively or positively on the profitability and performance of companies. The attached importance to the issue of exchange rate is no doubt due to current trends in the business environment where domestic companies, regardless of size segment could no longer mind their businesses due to globalization. That is, exchange rate is a major technical instrument upon which businesses can survive and make profit. Copeland (2005), “the increased importance joined to exchange rate is to an extent a result of the internationalization of business, the continuing growth in the world trade relative to national economies, the trend towards economic integration and the swift pace of change in the technology of money transfer. It is also a large consequence of the truth that exchange rate is not only variable, but highly volatile.