ABSTRACT
The Australian dollar has been one of the most volatile currencies in the world over the period since floating in late 1983 (Matthews and Valentine 1986). This volatility has apparently caused some Australian businesses to incur huge foreign exchange losses. Examples of such losses that have been prominently reported in the Australian financial press include the AWA case and ‘gnome loans’ whereby the Australian businesses borrowed in terms of foreign currencies at apparently favourable interest rates only to find that after the depreciation of the Australian dollar the expost effective interest rates were many times higher. According to Business Review Weekly of 20 November 1987, statutory authorities responsible for electricity, roads, water, public transport and shipping in Victoria and New South Wales are facing foreign exchange losses of more than $1.9 billion as a result of borrowing overseas, and are ‘still so heavily exposed to movements in the $A that every 1 percent fall costs them tens of millions of dollars’ (ibid.: 76).
