We described how exchange rate risk could be hedged using forward contracts. In pegged or limited-flexibility exchange rate systems, countries imposing capital controls sometimes force their importers...

We described how exchange rate risk could be hedged using forward contracts. In pegged or limited-flexibility exchange rate systems, countries imposing capital controls sometimes force their importers and exporters to hedge. First, assuming that forward contracts are to be used, and an exporter has future foreign currency receivables, what will the government force him to do? Second, how does this help the government in defending their exchange rate peg?

Q67

In years past, Belgium and South Africa operated a two-tier, or dual, exchange rate market. The two-tier market was abolished in March 1990 in Belgium and in March 1995 in South Africa. Import and export transactions were handled on the official market, and capital transactions were handled on the financial market, where the “financial” exchange rate was freely floating. Discuss why such a system may prevent speculators from profiting when betting on a devaluation.