International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 19

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.