In a world of stable currency exchange rates, there is no need for risk management. In a world of limited volatility and infrequent changes in a system of fixed exchange rates, there may be some interest in risk management. In a world of wide swings in currency exchange rates, risk management becomes a necessity.
This is a world of increasing volatility in currency exchange rates. Volatility, in general, is associated with instability. This, in itself, is a testament to our seemingly growing incapacity to control our created economic and financial systems. We first declared gold and silver to be deemed money. Currencies, which were convertible into gold and silver, eventually gave way to another man-made system of infrequently adjusted fixed rates of exchange among the leading currencies where one currency, the U.S. dollar, was convertible into gold. Then this system gave way to another predominantly "dirty" managed system of floating exchange rates, where a currency is convertible only into another currency.
Many of the world currencies have limited convertibility to other currencies. Companies doing business in these nations have to adapt their financial affairs to fit the situation. That is to say, the conduct of business is guided, among other things, with an eye on how much currency is being accumulated. Even for convertible currencies associated with industrialized nations, the conduct of business is influenced by which currencies are being accumulated and which are being liquidated. As shown in Chapter 6, changes in currency exchange rates since the early 1970s have been significant. Therefore, these changes have significantly impacted the reported profitability of subsidiaries and affiliates when their financial reports were translated to the standard currency of the parent company.