CHAPTER 1 INTRODUCTION • Background to Study Foreign exchange is the means of payment for international transaction

CHAPTER 1
INTRODUCTION

• Background to Study

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Foreign exchange is the means of payment for international transaction. It is made up of convertible currencies that are generally accepted for the settlement of international trade and other external obligation. Just like every other commodity, a market is established which works more like any other market, having a supply curve, a demand curve and an equilibrium price and quantity. There are also conditions, which are held constant (Ceteris paribus). When these conditions change the curve shift and there is a change in the equilibrium price quantity. This market for currencies is known as the foreign exchange market.
The foreign exchange market, according to the central bank of Nigeria is the medium of interaction between the sellers and buyers of foreign exchange a bid to negotiate a mutually acceptable price for the settlement of international transactions. The sellers of foreign exchange constitutes the supply while the buyers of foreign exchange constitutes its demand. The supply of foreign exchange is derived from oil exports, non-oil export, expenditure of foreign tourist in Nigeria, capital repatriation by Nigerians resident abroad etc.The demand for foreign exchange on the other hand consist of payments for imports, financial commitments to international organizations, external debt service obligations etc.
Before 1958, when the central bank was established and the enactment of the exchange control act of 1962, foreign exchange was earned by the private sectors and held in balances abroad by commercial banks which acted as agents for local exporters. Another feature of this period was that agriculture exports contributed the bulk of foreign exchange receipts. The fact that the British pound sterling was at par with the Nigerian pound sterling with easy convertibility delayed the establishment of an active foreign exchange market. However by 1958, when the central bank was established and subsequent centralization of foreign exchange authority In banks, the need for a local foreign exchange market became paramount. Other factors that led to the evolution of the foreign exchange market in Nigeria include:

The changing pattern of international trade institutional changes in the economy Structural shift in production etc. By the early 1970s, the official exchange receipt was enhanced following the sharp rise in prices and demand for crude oil exports which had by now displaced agricultural exports. The foreign exchange market experienced a boom during this period and there became a need for the management of foreign exchange resources. However, it was not until 1982 that comprehensive exchange controls were applied.
The exchange control system failed to evolve an appropriate mechanism for foreign exchange allocation. This led to the development of a dual exchange rate system, comprising of the first and second tier foreign exchange market, which was adopted in September 1986. The first tier was managed while the second tier was subjected to market forces. Not only has there been a metamorphosis of the institutional frame work from second tier foreign exchange market (SFEM) to foreign exchange market (FEM) to inter bank foreign exchange market (IFEM) to Autonomous Foreign Exchange market (AFEM) etc, there have been frequent changes in operational guidelines and procedures. Various pricing methods, marginal and weighted average exchange rates determinations and the Dutch Auction System (DAS) among others have also been adopted.
All of these aimed at ensuring more efficient allocation and utilization of scarce foreign exchange resources, to enhance the flow of capital into the country, stimulates domestic industrial production, promote export, increase revenue to the government, help reschedule our foreign debt at more profitable terms etc.
When there are fluctuations in foreign exchange rates, various economic activities are usually affected such as the purchasing power, balance of payment, prices of goods and services, import structure, export earning, government revenue, external reserves among others.
Several policies have been implemented since the subject of exchange rate fluctuations and instability became a pertinent issue in Nigeria, this is because the wishes and aspirations of any sovereign state is to be able to have a viable economy which can compete globally with others Nations of the world. This task is achievable only when the exchange rate with other is consistent and stable with other currencies.
The failure to realize this has subjected the Nigerian state to a lot of setbacks shrinking economic state. All sectors of the economy, especially the manufacturing sector has been greatly greatly affected. Foreign direct investment (FDI) that should come to the come to the country have been stalled with many investors leaving the country on a daily basis.
In order to curtail the problem of this unstable exchange rate, many policies and programs like the structural adjustment programs (SAP), was organized by the federal government through the Central Bank of Nigeria (CBN), the efforts however failed to stabilize the currency fluctuations.
In macroeconomic management, exchange rate policy is an important tool because of changes in the rate of exchange have far reaching implications in the County’s balance of payment and even its income distribution growth.
Nigerian been an import-dependent economy and given the centrality of the exchange rate to a Nation’s economic survival and wellbeing has made many researchers to write on this topic in recent years.
The exchange rate market in Nigeria has been a major source of concern for stakeholders in recent years because of the volatility and instability of of this market. The Nigerian economy is a monolithic economy, which depends mainly on oil and import most of its goods from the other developed countries of the world, the reason why there is high demand for foreign exchange. Since the country depends mainly on importation on goods and services from the other parts of the world, there is a high demand for the foreign exchange which has crippled the local economy. Manufacturers, small and medium-sized enterprises(SMEs) have all been crippled because most of their products are being imported from outside the Country and they have to source for foreign currencies so as to be able to make this importation.
The continuing dependence on goods from foreign countries has weakened the Nigerian against the United States Dollar and other foreign currencies. These dependence has increased the demand for the dollar in Nigeria and caused many inconsistencies in the market. Consequently, the teeming population of Nigerian has been made to bear the brunt as the prices of goods and services has increased by over 200% in three years. The market owners have attributed the increase to the problem of accessing foreign exchange.
There is high demand for foreign currency in all sectors in Nigeria because of the inability of those sectors to operate in their full capacity and efficiency. The education sector in the Country is in a very bad state and most citizens prefer to send their children abroad so as to get quality education which may not available in Nigeria. The resulting effect of this is that it has proved a lot of pressure on the demand for foreign currencies thereby shrinking the local economy. The health sector is also not left behind in the this because most Nigerians especially he elites who can afford it prefer to seek medical attention in overseas countries rather than use the local healthcare system which is nothing to write about. They prefer to seek better health care system in the United States of America and also in the United Kingdom which has also put intense pressure and led to an increase demand for foreign currency. The increase in demand for the United States dollar in Nigeria has incapacitated many Companies and firms, some of them have even stopped operation. The economy is grounded because the level of local production is at its minimum in recent years. The cost of doing business is very high because of the present exchange rate of the Nigerian Naira against the United States Dollar.
The fact is that any Country where the rate of import of goods and services is high and attention is not given to the production of locally made goods and services stands at risk of being grounded in a huge economic crisis. Most goods used in Nigeria are been used in Nigeria are been imported from foreign countries, even where the goods are being produced in some cases, the raw materials are being imported. These have caused the Nigerian Naira to be weakened against foreign currency like the US dollar over the years.
It is on this background that will want to build this research topic so as to be able to fully analyze the concomitant effect of the instability of the foreign exchange market on the economic viability of Nigeria.
This prevailing instability in exchange rates and its effects on various economic variables will be the areas of concentration of the research work.

1.2 Statement of the Problem

The issue of the exchange rate has been the major subject of discussion on the street among most Nigerians today ,especially with the present economic reality in the Country. The goal and purpose of every economy is to be stable and been vibrant enough for local and foreign investors, this has not been the case in the Nigerian state. Several economic economic stabilization has been put in place to rescue the Nigerian currency, which has been in free fall for over three decades, but made worse since the year 2015 (Sahara Reporters, 2016).
The currency has depreciated so much because the economy is majorly an import-dependent one and by this put a lot of demand on the currency of foreign countries where goods and services are being imported from, like the United States. The resulting effect of a falling exchange rate and a depreciating currency has put the Nigerian state in economic hardship and an untold poverty line. Manufacturing activities has been paralyzed in all the 36 states of the federation with local and foreign investors packing up because of the large burden of debt on them. Since the Naira has weakened significantly to the United states dollar, manufacturers cannot easily import the raw materials for the production of goods and services.
The exchange rate fluctuations have also increased the cost of locally made goods because the local manufacturers also claimed that they import the raw materials from other Countries at a high exchange rate. The Country’s balance of payments has also been negatively affected as a result of this shrinking Nigeria currency.
Since September 1986, when the market determined exchange rate system was introduced via the second tier foreign exchange market, the Naira exchange rate has exhibited the features of continuous depreciation and instability.
This instability and continued depreciation of the Naira in the foreign exchange market has resulted in declines in the standard of living of the population, increased cost of production which also leads to cost push inflation. It has also tended to undermine the international competitiveness of non-oil exports and make planning and projections difficult at both micro and macro levels of the economy. A good number of small and medium scale enterprises have been strangled out as a result of low dollar/ Naira exchange rate and so many other problems resulting from fluctuations in exchange rates can also be identified.
This movement of the exchange rate along the path of depreciation since 1986 has raised a lot of questions on the impact of exchange rate policies on the Nigerian economy. It is therefore the goal of this study is to identify these problems and make recommendations, which will help, reverse this prevailing trend.
In order to conduct research to find possible answers, we have to look at the primary research question which is to determine what extent does the forex market affect Nigerian exchange rate economy?

• Motivation and Purpose of Study
The purpose of this research is to critically examine the challenges facing the exchange rate in the country and how these challenges can be effectively overcome. The exchange rate of a particular country is what is been used in any foreign transaction and so must be given maximum attention ,especially in the Nigerian case where the currency is loosing value on a daily basis We examined why the agencies saddled with the responsibility of stabilizing the exchange rate has has not been able to do much in recent years.The motivation for this research is borne out of the fact that the Country has suffered tremendously from the instability and inconsistency the Naira in the last 30 years. The purpose of the study is to examine the following:
• Take a critical look at the reasons why the policies initiated by the government through the CBN have not yielded significant result in the stabilization of the Naira.
• Analyze the extent to which unfavourable exchange rate has paralyzed all economic growth in the country.
• Examine the effectiveness or the noneffectiveness of the policies of government in strengthening the Naira.
• Examine the Role that the exchange rate of a Country plays in the total economic performance, sustainability and development of the Nation.
• Analyze the problems that the Nigerian state has faced in relation to the exchange rate and the County’s import dependent economy.
• Come up with laudable recommendations that can help strengthen the Naira and improve the balance of payments and consequently improve local production.
• Lastly, this work will enable us to take a look at the relationship between foreign exchange rate and the economic viability of a Country.
The significance and purpose of this research cannot be overemphasized as all indices will be brought to the table and analyzed critically. The recommendation of this research work if given serious attention and consideration will help rescue Nigeria from a position of a collapsed economy and thereafter strengthen the Country’s currency and increasing local production as a result of a more favourable monetary policy

1.4 Contribution to Knowledge
The very strong contribution of this work to scientific knowledge stems from the deep analysis and a look at the problem of the exchange rate in Nigeria. Unlike the other work which just examined the danger posed by fluctuations in the foreign exchange. The approach followed in this work is different to other ones in the literature as it uses the indices and all parameters that is often used to quantify a failed economy because using the relationship between the exchange rate and the economic growth of a particular Country. Statistics of Exchange rate fluctuations since the beginning of the fourth republic in 1999 will also be examined. Recommendations will be made on how to overcome the problem of exchange instability in Nigeria as that will be a major contribution to scientific knowledge.

1.5 Significance of Study

This study shall benefit a lot of people first, it shall benefit Nigerian Economic Planning Commission (NEPC). The study would identify the strengths and weakness of exchange rate policy and management, identify those economic variables that are mostly affected by instability in exchange rate and provide the general public with the awareness on the foreign exchange transaction and its impact on the economy.
The various findings of this would enable the government and financial institutions to device, modify and adopt a better foreign exchange transaction policies for the economy.
The general objective of the study will be to analyze the reason why the foreign exchange market (forex) is affecting the exchange rate of Nigerian economy and also to give recommendations which will help reverse this prevailing trend. 
Specifically, the study will:
1. Assess the level of how the forex has affected the exchange rate of Nigerian economy.
2. Investigate the factors responsible on why do large government and non-governmental organization involve in forex market.
3. Examine the impacts of forex regarding Nigerian economy.
4. To identify these problems and make recommendations, which will help, reverse this prevailing trend. 
5. Why does the forex market affect the exchange rate of Nigerian economy?
6. Identify the main reason why people are still joining the market.
7. Assessing why the market is special and important.

1.6 Research Questions

These are well structured questions designed to help us in the course of this research. We will examine if the answer to these questions would provide solutions to the problem we aim at solving. The following are the research questions for this work

( a) Why does the forex market affect the exchange rate of Nigerian economy. We need to find out why the forex market actually affects the exchange rate?

( b ) How does the foreign exchange market affects Nigerian exchange rate. We need to figure out how it affects the exchange rate?

(c ) Has the government interventions in the past years towards the stabilization of the exchange rate in Nigeria yielded positive results?

( d ) How has the instability of the exchange rate affected the growth and development of the Country since the beginning of the fourth republic?

1.7 Research Hypothesis

For meaningful findings, conclusions and recommendations, a set of testable hypothesis based on available data will be necessary. In the course of this research work, the following hypothesis would be tested. Hypotheses in a research work helps to give direction and guidance to the work which facilitates data collection with proper interference analysis and conclusion. Hypotheses are structured in a different way, unlike research questions; they are outlined as possible solutions to the problem and not as questions. The following research hypothesis will be used in this research work.
The continued fluctuation in the exchange rate of the Naira has reduced the purchasing power of the average Nigerian.
• The continued fluctuation in the exchange rate of the Naira has reduced the purchasing power of the average Nigeria
• Exchange rate fluctuations has had effect on the Nigerian economy
• Fluctuations in exchange rate have significant effect on the purchasing power of the average Nigerian
• The fall in the value of the Naira exchange rate has affected the importation of goods
• The fall in the exchange rate has had sificant effect on importation
• Exchange rate fluctuation have effect on the importation of goods in the Nigeria economy.

1.8 Study Limitation
Some constraints are anticipated in the course of the present study. In every research definitely there are limitations. So In order to conduct this study there are some meaningful and useful items but limitations will unfortunately be inevitable. The first major study limitation anticipated is shortage of funds to cover all the state in Nigeria. The researcher has limited the sampling frame to Abuja capital city of Nigeria to allow easy and more affordable questionnaire administration. Also difficulty in accessing some people and offices to get relevant materials and resources for this research posed a time constraints possibility.

1.9 Definition of Terms

FOREIGN EXCHANGE: Foreign exchange is a means of payment for international transactions. It is made up of currencies of other countries that are freely acceptable in settling international transactions.
FOREIGN EXCHANGE MARKET: This is a medium of interaction among buyers and sellers of foreign- exchange with a view of negotiating acceptable prices for settling international transaction.

EXCHANGE RATE: This is the price of one currency in terms of another.

SEMI: Second tier foreign exchange market. Under this system the exchange rate regularly determined by market forces.

AFEM: Autonomous foreign exchange market. These exchange rates under this system are being determined essentially through market forces.

IFEM: Interbank foreign exchange market.

DUTCH AUCTION SYSTEM: (DAS) this is a method of exchange rate determination through action where the bidders pay last bid rate that clears the market.

DUAL EXCHANGE RATE REGIME: This situation exists when two exchange rates are in existence in an economy.

MARGINAL PRICING METHOD: This is the method in which bid rates are arranged in a descending order of magnitude the last bid rate at which available foreign exchange is exhausted (marginal rate) is the applicable exchange rate.

EXCHANGE CONTROL: This is a foreign exchange arrangement in which the government purchase all incoming foreign exchange and is the only source from which foreign exchange can be purchased legally.

CHAPTER 2
2.1 Exchange Rate Dynamism in Nigeria
In Nigeria, exchange rate management has gone through different stages in Nigeria from the Independence up to this very time. At independence in the year 1960, the country operated a fixed dollar and put a lot of restrictions on imports of goods and services from other parts of the world because of the danger that such practices posed to the economy. In the year 1978 the Nigerian government pegged the Naira to a basket of 12 currencies of her exchange rate regime fixed at par with the British Pound and later with the major American trading partners.
The Nigeria Naira at this time remained very strong until the year 1978 when the prices of oil, which is the Nigeria’s sole source of income began to fall at a very rapid rate. The sharp fall in the prices of crude began to affect the foreign exchange earnings and the once vibrant economy began to shrink that it could not meet its financial requirements both locally and in the international market. To curtail the challenges of the exchange rate problem, the stabilization act was implemented in the year 1982 and this led to the depreciation of the Naira. The inability of the stabilization act to address the exchange rate problems such as unpaid trade bills led to the establishment of the Structural Adjustment Program (SAP) in the year 1986 which was aimed at providing a more viable and robust exchange rate regime through flexible arrangement. The introduction of this Structural Adjustment Program provided a huge volatility and uncertainty in the exchange rate of the Naira against other currencies especially the United States Dollar.

Figure 2.1: Exchange rate fluctuations in Nigeria
Source: www.cbn.org
The figure clearly shows the rate of the fluctuations of the Naira from the year 1970 till the year 2014. It can be evidently seen that the Naira was relatively stable and fixed between the year 1970 to 1992. However, the currency began the decline journey in the year 1994 and has consistently been depreciating against the dollar. The weakening of the Naira is predominantly as a result of the monolithic economy, which is being operated in the country, the country earns foreign exchange through the sale of crude oil. The prices of crude fell in the international because of other competitors and some of the countries that used to buy crude oil from Nigeria switch to the other oil producing companies. The problem was more compounded because Nigeria is a monolithic economy in which the income and foreign exchange earning is just depending on one commodity which is oil. Efforts were made to diversify the economy into other viable areas like agriculture,mines and steel and manufacturing but no reasonable progress was made. The currency continued to shrink against other currencies of the World but came to its lowest ebb in the year 2015 when the crude oil price came to its all-time low. Oil price in the international market fell from 120 dollars per barrel to 30 dollars per barrel and the production volume also dropped due to the security issues in the Niger Delta parts of the Country. The Naira went as low as 520/1 dollar in the year 2016 and is presently at 360/1 dollar in the international market. The federal government made so many interventions and it became relatively stable from the year 2017 till the present time. The instability has caused serious economic problems for the citizens and also in the international community. The prices of goods and services has significantly increased,making the economy went into a recession.
2.2 Export Performance in Nigeria.
The rate of export of a particular country determines the foreign exchange that it earns and this ultimately enhance the revenue and promote rapid economic development . The performance of export is seen as a catalyst for all-round development and increases the foreign exchange earnings of the Nation which now helps to promote sustainable economic development.
One other main macroeconomics objectives is to achieve full employment and sufficiency which is only achievable when the level of exports increased. An increase export will reduce the rate of importation and provide job opportunities for the citizens because the production rate in the Country will increase and many people will be engaged.Export commodities in Nigeria can be classified as into oil and non-oil products( agricultural products, mineral explorations and others). At the advent of Independence in the year 1960, agriculture was the may source of Nigeria’s foreign exchange earnings and it helped the country so much in terms of huge revenue because agricultural produce was being exported to many parts of the world. Suddenly, the advent of crude oil production came in the year 1970 and the Nation shifted her attention from agriculture to oil,and that marked the beginning of the Nation’s depleted foreign exchange. Agriculture was neglected and attention was shifted to crude oil exportation. The earnings from the export later became unstable and this plunged the Nation into series of crisis as the foreign exchange declined significantly

Figure 2: oil and non-oil sector export in Nigeria
Source: www.nbs.org
The figure 2 above gives the comparative analysis of the oil and the non-oil export in Nigeria. It reflects how attention was shifted to the exploration of only oil and when the oil price fell in the foreign exchange market, our foreign exchange earnings decreased significantly and led to economic problems in Nigeria.
This section underscores the importance of a diversified economy in the Nation’s economic recovery and growth plan if the her foreign exchange earnings will be strong.

2.3 Impact of Foreign Exchange Market Rate in Nigeria.
Afolabi(1998) in his research stated that an exchange rate is the rate at which one currency will exchange for the other in both the local and international market.This underscores the importance of the exchange rate to the economic viability of a Nation’s survival as it determines and regulates the prices of every other commodity locally.
Nzotta(2004) in his article explained that the exchange rate is the rate of transformation of one currency to the other.
The Author stated that the foreign exchange rate of a country is maintained at an arbitrage which means that the buyer source for and buy at a market where the exchange rate is low and sells the same at a market where the market is high. The difference in the arbitrage is the income accrued to the marketer. The exchange rate of a country can be at a fixed rate as was in the case of Nigeria before 1986 when the Structural Adjustment Program was introduced. Exchange rate today is usually regulated by the interplay of the forces of demand and supply (Umeora 2010) in which the impact of exchange rate regime at different point in time has had far reaching effects on the economic stability of a Nation.
The central bank of Nigeria in recent years has had the cause to employ monetary policy in order to achieve macroeconomic management and its also a tool to regulate monetary aggregates such as inflation rate interest rate, money supply and bank credit with a view to provide economic viability and generate employment for the citizens in the Country. The exchange rate is one of the intermediate policy variables through which monetary policy is transmitted as a result of its impact on the value of the prices of goods in the country and also the domestic currency. Changes in the exchange rate may trickle down to affect the prices of goods and services and also the cost and standard of living of individuals and firms. For instance, appreciation in the value of the exchange rate will make the importation of goods relatively cheaper while depreciation in the value of the exchange rate becomes a bottleneck for the exporting countries but an advantage to the Country importing the goods as in the case of export of oil from Nigeria to the United States of America.
Changes in the exchange rate, therefore, has implications for individual firms and business organizations and for the Country at large. The exchange rate is still a significant as a relevant transmission channel for monetary policy.
The Enactment of Exchange control came in the year 1962, bur before the passage of the law private operators earned the foreign exchange and this made only foreigners to be doing business of foreign exchange at that time(Umeora,2010). Only Agricultural produce was the major source of earning of the foreign exchange for the Nigerian government and the federal government was later created to ensure maximum regulation of e foreign exchange sector and avid all irregularities. The increasing demand for foreign exchange through persistent importation of goods from outside the country became a big disadvantage to the Nigerian government and it decreased the value of the Naira in all fonts. An illegal market was also introduced which is called the “Black market” and it has lasted till today with legality enthroned into it by the federal government.
The increasing demand for foreign exchange in the face of a shortfall in supply necessitated he need for greater controls and regulation of the foreign exchange market and the government came up with series of programs to in order to rescue the foreign exchange market. Structural Ajustment Program(SAP) was introduced in the year 1986 by the central bank of Nigeria.The second Tier Foreign market (STFM) was also introduced in the to find a realistic exchange rate for the Nigerian Naira by employing the market forces. In order to also strengthen and increase the capacity of the foreign exchange market, the bureaux-de change operation was established in the year 1987 for dealing with the privately sourced foreign exchange. Autonomous Foreign Exchange Market(AFEM) was also introduced in for the sale of foreign to end users by the Central Bank of Nigeria through authorized dealers across the Country so as to make the foreign currency more accessible to buyers. In the beginning of the fourth republic in the year 1999, Interbank Foreign Exchange Market(IFEM) was also introduced, Dutch Auction System (DAS) was established in 2006 and many other policies have been implemented by the CBN in a bid to stabilize the foreign exchange market. In all of these, the forces of demand and supply still controls the market, although special market windows was introduced for the manufacturers,people seeking medical attention overseas and students going to study abroad so they can access foreign exchange easily.
2.4 Conceptual Framework.
Conceptually, Exchange rate means the price of one currency over the other one. Bringing it to the Nigerian context, the exchange rate is the amount of Nigerian Naira dollar needed to exchange for another country’s currency, for example the United States’ dollar (Campbell, 2010). The foreign exchange policies in Nigeria is the one governing the foreign exchange management across the country which, according to (Obaseki, 2001) is the sum of the institutional framework and measures put in place to gravitate the change rate towards the desired level and stimulate manufacturing sector, reduce inflation, reduce the interest rate, improve the level of exports and stop the level of importation to a reasonable level. The management of the foreign exchange rate is also important so as to improve the foreign direct investment (FDI) and encourage many investors to stimulate the economy.
The Exchange rate policy also gives the way and work out the mechanism for channeling foreign exchange to end-users, so and therefore reflects the institutional,system of exchange rate determination and the allocation and appropriation of foreign exchange and implementing foreign policies for the management of the exchange rate. The importance of the conceptualizing this research work is just to examine all the variables that affects the exchange rate fluctuation and how the situation can be remedied.

Figure 2.2: Conceptual framework

2.4.1 Foreign Exchange Management in Nigeria.
The need to regulate the foreign exchange market in Nigeria has brought about different policies regime and interventions by the Central Bank of Nigeria at different points in time. The Management phases can be basically grouped into four, which are as follows,the first being the fixed parity predominantly with the British Pound and the United States Dollar between the year 1959-1985, the second intervention was the introduction of the second-tier foreign exchange market from the year from the year 1986-1994, the third intervention was the introduction of the autonomous foreign exchange market between the year 1995-1999, and the fourth intervention was the introduction of the Inter-bank foreign exchange market which was introduced in the year 2000. The first of the intervention of the Nigerian exchange rate policy began with the establishment of the Central Bank of Nigeria in the year 1959. This agency of government was established in order to obtain a sound and table currency and also reduce the fluctuations in the value of the Naira. This ministry was headed by the governor of the central bank who must be appointed by the president subject to the confirmation of the senate. The Central bank has come up with a series of regulations and control measures, especially with the increasing lots of value of the Naira in since the year 2015. Most of these control measures are good but are not sufficient on their own to stabilize the Naira against foreign currencies.
The best approach to the stabilization of the Naira is to apply the import substitution strategy where imports will be reduced to the barest minimum and exportation of goods and services will be promoted and that is the best way to manage the foreign exchange as it is being done presently by the Central Bank of Nigeria. The CBN in the management of the foreign exchange rate has given a lot incentives to the local manufacturer and small and medium-sized enterprises (SMEs) so as to increase the local production and reduce the rate of importation into the country. The only viable and efficient means to effectively manage the fluctuation is increase the export of goods across the country and ensure proper diversification of the economy from the present one which is majorly oil-dependent economy
In the year 2015, when the prices of crude oil crashed across the world, Nigeria because of its monolithic operated economy suffered immensely as the foreign exchange earnings decrease significantly in the Country, the dollar strengthened by over 200% against the Nigerian Naira and the Country went into a recession in the third quarter of the year 2016, the government made some palliatives temporary interventions and a little stability came to the Naireven though it is still v weakk asnst the dollar. The federal government under the present administration of President Muhammadu Buhari resolved that the only way to stabilize the Naira and increase the foreign exchange earnings is to diversify the economy. The government through the central Bank decided to diversify the economy into agriculture and encourage the people to go back to the farm. This initiative has yielded some significant in stabilizing the Exchange rate. Importation of agricultural produce into the Country from different Nation has reduced drastically and this has reduced the rate of demand for the foreign currencies like the US dollar
For example, before the year 2015,more than 90% of the rice being consumed in the Country is being imported from Thailand,a serious situation indeed, because many states of the federation have the capacity to go into rice production in a large scale.for instance, Lagos and Kebbi have partnered and have started production of rice, a feat that cannot be achieved if we are still importing. Many other states of the federation have also started the production of one agricultural product or the other and the rate of agricultural goods import has reduced drastically.
The Table 2.1 gives the scheme of events in the foreign exchange management in the Country.
S/N
Year
Interventions
Comments
1
1959-1967
Fixed parity with only the British pounds
Suspended in 1972
2
1968-1972
The USD was included in the parity exchange
It came as a result of the 1967 devaluation of the Pounds.
3
1973
Revert to the fixed parity with the British Pounds
The American dollar was devaluated
4
1974
Parity of both the pounds and the dollars
reduce the effect of devaluation of individual currency
5
1978
Trade and weighted basket of currency approach
Seven currencies like the US dollars, British pounds, German Mark, French Franc, Japanese Yen, Switch Frand the the Dutch Guilder were all involved
6
1985
Reference on the dollar
This was done to prevent arbitrage prevalent on the basket of currencies
7
1986
Adoption and the implementation of the second tier foreign exchange market
The economy was deregulated
8
1987
Merger of the first and the second tier market
merger of rates was was done
9
1988
Interbank foreign exchange market was introduced
There was merger between autonomous and the firm rates
10
1994
Fixed exchange rate
Basically done to regulate the economy
11
1995
Introduction of the autonomous fixed foreign exchange market
A guided deregulation was done
12
1999
The Interbank foreign exchange market was re-introduced
Merger of dual exchange rate after first exchange rate was abolished
13
2002
Dutch Auction System(DAS) was re-intoduced into the market
Retail DAS was introduced at the first instance with the CBN selling to the end-users through authorized users (commercial banks)
14
2006-2010
Introduction of Wolesale DAS
The market was further deregulated
Source: www.cbn.org
All the above interventions give the summary of all that has been done in order to rescue the foreign exchange market.When the market could not be salvaged in the year 2015 due to the continuous fall of the Nigerian Naira against the US dollar, the Federal government through the CBN decided to start pumping some amount of foreign exchange to the economy so as to be able to meet the demands.this was also done so as to bridge the gap between the parallel/black market and the Inter-bank market. This solution has just done but little to the foreign exchange Market. The black market rate is now closed to the Interbank market and some market stability has been achieved, although there is still much work to be done by the CBN

2.5 Concept of Exchange Rate Volatility
Mundell (1968) in his articles has brilliantly outlined the implications of financial flows and financial market integration. The author emphasized the implications of a loose financial flow in the economic survival and integration of a particular Nation.The Nigerian Naira has experienced a large scale volatility in recent years as a result of the prevailing inability that has besieged the performance and effectiveness of the currency in the recent years.
The Exchange rate in Nigeria has been very volatile in recent times because of the economic situation in the Country. The market has been fully deregulated and the forces of demand and supply interact freely to dictate the prices of goods and services in the foreign exchange market. As a result of the high level of importation of goods and services into the Country, the market has been operating at an increased volatility. The Autor emphasized that increasing market mobility and monetary policy is limited and inefficient under fixed exchange rates. The stock of money, which is circulating in the economy later adjusts to the economy with time. This ultimately means that an increased sensitivity will ultimately lead to disturbances in growth of the foreign exchange market
Hausmann(1999) and Kamil (2006) also opined that developing countries should also be able to borrow from their the developed countries in their own currencies so as to reduce the burden of an increase demand for the foreign currency. If Countries like Nigeria through bilateral agreements are able to settle debts in the local currencies, it will reduce the volatility of the foreign exchange in the International Market.
Levi Yeyati (2002) opined that the exchange rate flexibility reduces growth in developing countries whereas fixed and intermediate regimes perform better than floats in well developed climes.

2.6 Causes of Foreign Exchange Market Pressure and Fluctuation in Nigeria.
Pressure in the foreign exchange market is the situation occurs when the exchange rate in a particular country depreciates under a flexible exchange rate regime rather than a fixed exchange rate regime. The index is associated and tagged with two basic indices which are the International external reserve and the normal exchange rate. The exchange rate of a particular country can come under intense pressure and subjected to fluctuation when the demand for a particular foreign currency exceeds the supply of such currency. Girton and Ropper (1977) in their published article described the Exchange Market Pressure as the sum of the changes in the external foreign reserve and the exchange rate. In the case of Weymark (1995), the authored viewed the external market pressure as the change in the exchange rate that is required to eliminate and bridge the gap of the excess demand of the currency without any interference and intervention in the foreign exchange market. Another view of the Exchange Market Pressure was proposed by Eichengreen et al (1996) is that the exchange market pressure is the weighted average of the changes in the exchange rate, interest rate and the external foreign reserve. This concise definition further reiterates the importance of liquidity in the interaction between domestic money and foreign exchange market.
This section of the work will discuss the factors that causes pressure and consequently fluctuations in the exchange rate of a particular country.
2.6.1 External Factors.
The external factors poses great pressure to the stability of the exchange rate, especially in Nigeria and in other developing countries. The external factors are further divided into demand and supply factors. The demand factors will be explained first and will be elaborated.
• Interest Rate: The Interest rate is an external factor that affects the exchange market pressure through the demands for money and investment channels. It can be explained simply with the principle of opportunity cost when the investor makes choice between local investment and taking the money abroad for investment in other economies where the foreign interest rate may be higher. An increase in the foreign interest rate will lead to a decrease in the demand for local currency because many investors will prefer to invest their money where they will be able to get a high return of interest. So the demand will be much to get the foreign currency at the expense of the local one. This is how the concept of interest rate can reduce the value of the local currency through excessive demand for the foreign currency. A typical example of this is the case of the United States when the federal policy rate was increased in the year 2005 and immediately brought about excessive cash and capital inflow from just emerging economies like Nigeria because many investors decided to invest abroad rather than engage in local investment.

Figure2.2: Interests Rate in Nigeria
Source: www.nbs.org
• Domestic Inflation: Inflation occurs where there is so much money in circulation used in the exchange of few available goods. In the foreign exchange concept, changes in the general price level influences the exchange rate movement. A higher inflation rate will decrease the exchange rate and will effect a fall in the international competitiveness of exported goods and products. It is known that once the level of export drops, the rate of importation will increase and demand for foreign exchange will increase, thereby bringing pressure and fluctuation on the exchange rate. High inflation rates imply in a country means that the domestic goods become more expensive that foreign goods and reduce the competiveness on those goods. When the foreign goods become cheaper, there will be increase in demand for the foreign exchange in order to purchase those goods and this apparently increase the instability of the foreign exchange and put more fluctuation and competition on the foreign exchange market.
• Changes in the Country’s Income: The level of income in a particular country determines the economic activities that are going on in such a place, A country with large income means the level of exportation is far more greater than the rate of imported goods, when exports exceeds imports, there will be less demand for foreign exchange and so the foreign exchange market in the country becomes very stable. In the case of Nigeria, the income earning is very low because it is an import dependent economy and most things consumed are being imported from foreign countries, this has been the main problem why the foreign exchange market has never been stable. The Naira has been so weakened against the dollar as a result of this basic problem of importation. The Foreign exchange market in Nigeria is full of uncertainty, speculations, fluctuation in recent years because the Country is not exporting so much so as to earn enough of foreign exchange and meet the demands of those in need of it.
• Monetary and Fiscal Policies: the Monetary and fiscal policy in a Nation stimulates economic activities. A favorable monetary policy to investors such as a reduction in the monetary policy rate increases the access of investors to credits and an increase appetite for consumer spending. The Monetary Policy Control (MPC) committee in Nigeria is chaired by the governor of the Central bank and they meet regularly to discuss ways to give policies and incentives that will encourage the local and foreign investors so that that the business activities can increase locally and reduce the demand for foreign exchange. Nigeria is an import-dependent economy and the liquidity is very high implies that there is more demand for foreign exchange and puts more pressure on the foreign exchange market. The Central bank of Nigeria in November, 2015 place a ban on 41 items from accessing foreign exchange at the interbank market, this regulation definitely increase the cost of importation and ultimately decreases the rate of importation. People were forced to consume the locally made goods because the CBN placed restrictions on the importation of those goods due to the high forex demand. Such monetary regulation control can be very good if the country want to reduce the pressure on the foreign exchange market.
• Contagion Effect: Contagion effect refers to the spread of economic crisis or boom from one country to the other. Nigeria is in the West-Africa Sub-region and its shared border with many countries like Niger Republic, Cameroon, Lake Chad and a host of others. The Economic viability or otherwise of these countries can affect the foreign exchange market in Nigeria.Contagion effect through trade channel can be simply explained when one country has to devalue her currency in response to an attack. This will bring a great effect on the trading partners of such country in terms of balance of payment and a host of other things. The Problem of war and instability in a country may also discourage investors and foreign direct investment in other neighboring countries because the potential investors sees those country as close to each other and what affects one may ultimately affect the other. They results into panic sales of assets and the foreign income earned in the particular country decreases because of not a problem in that Country but problem in the neighboring country.
• Speculation: currency speculation is the act of purchasing a credit at a market and time when it is relatively cheap and then holding it down to a later time when it can be sold to generate a huge profit. This speculation has adversely affected the foreign exchange market in Nigeria as a speculative attack on the value of a currency results in a huge depreciation on the currency and has forced the Central bank at many times to deplete the foreign external reserve in a bid to save the currency from a free fall. Sometimes the central bank invokes the doctrine of necessity and if they see that the foreign external reserve is inadequate for them to manage the exchange rate, they may sell local currency assets for the dollar to be safe. They also go into borrowing of local currency and pay back when it is at a cheaper rate.
• Ease of Doing Business: The ease at which business can be carried out in a country will go a long way in encouraging local manufacturing and production. In Nigeria, doing business is a tough job because of lack of a conducive environment and infrastructure. The roads are bad, there is erratic power supply and insecurity has made it difficult for both local and foreign investors to invest their resources in the Country. Absence of foreign direct investment has limited the foreign exchange earnings of the country in the last few years. The more the investment, the lesser the importation of goods and services and the easier it will be to earn foreign exchange. Government have been making all efforts to increase the rate at which the Small and the Medium-sized Enterprises will do business in Nigeria through the creation of enabling environment for them to operate so that the demands for foreign exchange can reduce drastically. The Insecurity issue in the Country is also another problem as the country is presently going through serious security challenges now. Many properties and business have been closed down in all part of the country as a result of the insurgency in the North East and some other parts of the Country. This insecurity has scared away many investors and the foreign exchange earnings has significantly reduced. The point we are emphasizing here is that the foreign exchange pressure and fluctuation in a country can be reduced drastically if the country concerned is involved in serious security issues that will discourage the local and foreign investors from coming to the country to invest. Every Investor wants a high return for their investment and no one will be willing to invest in a country where there are security issues and challenges
The supply factors that affect he foreign exchange market will be explained will be outlined in this section.
• Capital Reversal: Capital Reversal is just the sudden reversal in the cash flows. This situation occurs when there are more foreign investment opportunities in other countries than it exists in the home country. This also happens where there is a loss of confidence in the financial investment in a country by the International investors who are privy to a lot of information. This situation is peculiar to what we have in Nigeria, where a lot of investors have pulled out of business and stopped operation because they no longer have confidence in transacting business in the county. Some of the investors have been discouraged by the market regulations of the CBN which they termed as not favorable. Many investors pulled out causing more importation of goods and thereby put immense pressure on the foreign exchange market since the demand for foreign exchange we increase.
• Changes in Domestic Product: in Countries like Nigeria where there is too much dependence on imported products and little exportation is being made. There will be excessive demand for foreign exchange and this will ultimately lead to depletion of the foreign reserve. When demand for foreign exchange exceeds the supply because the economy is import driven, the central bank will be forced to sourced for foreign currencies which ultimately lead to the depletion of the foreign reserve.

2.6.2 Domestic Factors.
The domestic factors affecting the foreign exchange market have also been mitigating factors that have affected the foreign exchange market in the Nigeria and other developing countries.
• Import Dependence: A high degree of importation will definitely affects the foreign exchange market of a particular Country. This is the case in Nigeria, which is majorly an import dependent economy. For example, before the ban of those 41 items from accessing the foreign exchange from the Interbank market. The monthly average import bill is 917.33 Billion Naira, this depleted the foreign reserve from 37 billion dollars in June 2014, to 27 Billion dollars in June 2016.
• Foreign Debt: A country where foreign debt is being serviced can have a serious effect on the foreign exchange market. In Nigeria, the debt profile has increased considerably and this has affected the external reserves because these debts are being returned with foreign currencies leading to an increase in the demand for foreign exchange. This foreign debt factor has incapacitated the Central bank of Nigeria from being able to maintain a stable exchange rate.
• Interest Rate: The influence of domestic interest rate on exchange market pressure is in two ways and both sides will be examined in this section. The first case can be a decrease in interest rate, which makes domestic investment relatively less attractive to foreign investors and ultimately results in capital flight and exchange rate instability, depreciation and fluctuation. The second case is that the increase in the interest rate can attract increase the foreign exchange revenue and ultimately reduce pressure on the foreign exchange market.
• Political Stability and Security: the state of a Country’s political situation determines the volume of the foreign exchange earnings that will be accrued to such Country. This is the biggest thing on the mind of the potential investor before they come into the country to invest. This factor has greatly affected the Nigerian foreign exchange market for the past years because the political stability and security has been a major issue. There have been political, religious and ethnic crisis in Nigeria in since the beginning of the fourth republic in the year 1999. Election violence and destruction of lives and properties has been the order of the day. This has made the rate of importation to go up considerably as there are no enabling environments for local production manufacturing. The Foreign exchange market has been seriously affected because the market has been made unstable with all these pockets of violence across the Country. That is why the rate of exportation of goods and services has considerably increased because the importation rate has gone up. Almost everything that is being consumed in Nigeria is imported from other foreign Countries.

Figure 2.3: Security situation in Nigeria
Source: www.nbs.org
• Commodity Prices: The prices of commodities been exported by the Country is a major factor in the foreign exchange earnings of a particular Country. In the case of Nigeria, which is a monolithic economy,where only crude oil is being exported to other Countries. The Average price of oil between the year 1999-2013 is $100/ barrel. The Country earned so much foreign exchange from the sales of crude oil at this time, but failed to make maximum utilization of it. In the year 2014, prices of oil began to drop and it went as low as $30/barrel in the year 2016. The production capacity also dropped from around 2million barrels/per day to 1.2 Million barrels/per day. The foreign exchange earning went down sporadically and the economy went into a recession in the third quarter of the year 2016. The Naira became so weakened to the dollar and it became the worst depreciation in the history of Nigeria. This was also possible because Nigeria is running a monolithic economy where only one source gives the foreign exchange earning. On the other hand, if the price of a commodity goes up in a particular country, the exporting country will earn more foreign exchange and ultimately leads to the stabilization of the exchange rate. This has also happened in Nigeria as the price of crude oil as gone up again in International market and the Naira has strengthened more against the dollar although it has not gotten to where it should be. The price of crude presently is selling at $70/barrel in the international market and the production capacity has also gone up to 2.2 million barrels/day because the vandalization of pipes been carried out by the Niger Delta Avengers has been completely stopped. This is a typical illustration of how the price of an exporting commodity of a particular country can either put pressure on the foreign exchange market or boost the foreign exchange market in a positive way

2.7 Theoretical Framework
The framework for this research will be outlined in this section. Demburg and McDougall(1980) gave the definition of exchange rate as the commodity which can be fixed or by the market competing forces of demand and supply and exports and imports in a systematic competitiveness. The importance of this definition and perspective of the Authors is that it concentrates on the concept of price as a nature of the exchange rate. Bartov and Bodnar (1994) in their article emphasized that the long term impacts of foreign exchange are difficult to ascertain and determine and so hedging competitiveness for future cash-flows is doubtful.
Brown (2001) however, emphasized the critical assumption that the market should be aware of the of the company’s risk management is not realistic given the operational conditions and policies.Jhinghan(2003) iterated that the demand for the currency of a particular Country is the driving force behind the exchange rate.
The Author stated that the exchange rate of a particular is stable only when the demand for that particular currency exceeds the demands for other foreign currencies at a particular time. The exchange rate is controlled by the interplay of the market forces of demand and supply in a regime where rate is not fixed. The problem why the instability of the foreign exchange market in Nigeria and most developing Nations of the World is that the demand for foreign currencies exceeds the supply and thereby put a strain on the local economy. Situations where the rate of importation is very high like the situation in Nigeria have also affected the foreign exchange market due to excessive demand for the United State’s dollar and other hard currencies( Busari 1999).
Manta(1999) also opined that if the demand for a particular Country is high, it will cause depreciation on the value of the local currency and vice-versa. The government monetary and fiscal policies also also oftentimes influence the stability of the exchange rate such that an expansionary fiscal policy where most goods consumed in the country are majorly imported goods will lead to a low demand for domestic goods and greater exchange rate instabilities and fluctuations. On the other hand, A country where much dependence is on local production and exporting of goods and services to other parts of the world we have less demand for other foreign currencies and will consequently lead to foreign exchange market stabilization.
Most of the fundamental theories underlining the exchange rate discourse will be discourse below in this section.

• Purchasing Power Theory
Philip(2002) stated that the purchasing power theory is based on the believe that the relationship between the exchange rates of different countries of the world should be in the same ratio as the price of fixed goods and services.
The theory emphasized that there is a strong relationship and parity between the purchasing power of a particular currency and the exchange rate in that same Country. It means that there is a strong nexus between the exchange rate and the inflation rate. The exchange rates is equal to the different inflation rates(Asogu, 1998).
The purchasing power of a particular currency determines the strength or the weakness of the currency when compared to the other foreign currency. In Nigeria, the purchasing power of the Naira is very low because of the rate of inflation, which is presently at15% (Yusuf, 2018).
Large amounts of money are used to purchase few available goods and services and that leads to a very weak foreign exchange market. The purchasing power of the citizens has reduced drastically and this has restricted manufacturing and local production to a great extent, with this there is an increased demand for foreign currencies and the fluctuation and instability of the exchange rate has been enhanced.
The purchasing power theory also determines the suitable equilibrium exchange rate at which Countries should regain their monetary standard. This theory can be divided and explained into two basic forms which are the absolute form and the reactive form. The absolute form which elucidated on the point that the exchange rate should be equal to the general income, purchasing power with regards to the price of domestic and foreign commodities.
On the other hand, the reactive form explains that the change in the exchange rate when measured from a base year will reflect the relative rates in two Countries. In Practical terms, there are many challenges will encounter in inferring the equilibrium speed of adjustment between the duo of the asset markets and the good markets. We are also daily faced with the problem of selecting the appropriate price index in determining the exchange rate.

• Currency Based Theory.
Aslem (2002) The currency based theory was proposed by Aliber in the year 1971. The Author proposed that the currency based theory is determined and regulated by the foreign exchange and capital market which are not perfect in any given circumstance. He further emphasized that the internalization of firm can be explained with respect to the strengths or weaknesses of the currencies of different countries and how they differ relatively from one form to the other.
We have organizations and firms that are very strong and also there are organizations in some countries that are very weak. In a Country where the currency is weak, the income stream is encountered by a higher and more complicated exchange risk and as a result the income of a strong-currency firm is capitalized at a higher rate meaning that such firm is to acquire a large segment of income generation in the weak income organization sectors. The summary of this theory is that the currency of a particular country is basically the one that is regulating and fixing the exchange rate (Bakare 2011).
A weak economy will automatically generate a very high exchange rate to the disadvantage of the Country. The company and firm of the particular organization will also be suffering from the weakness of the currency because the manufacturing process will be at a high cost and many of them like in Nigeria and other developing countries in the world are suffering from this currency problem. The country can step up importation of goods and services if they want to earn higher foreign exchange and compete it more in the foreign exchange market which is actually a global market.

• Monetary Approach Theory
The monetary approach theory placed emphasis on the role of the financial transaction and the capital account of the balance of payment in generating the exchange rate changes. The excessive demand for foreign exchange is the one responsible for the disequilibrium in the balance of payment (BOP) in both countries. The capital transaction recorded by the given country is responsible for the change in the exchange rate at a given point in time (Harding 2001).
The theory proposes that the change in the exchange rate is primarily because of the firm’s change disequilibrium. The readiness of the citizens to hold the outstanding stock of money rather than firm the receipt of flow and payment arising from international payment at any given moment of time.
Therefore, exchange rate going by the Monetary approach theory is seen as the price of foreign money in terms of the domestic money. This theory can be further explained in a much practical and broader way if we consider an increase in the exogenously determined money supply brought about by the central bank of the government of Nigeria that purchase a bond in an open market. The supply of foreign exchange and the demand for the same will definitely affects the interventions that will be made by a particular government at one time or the other.
An increase in the domestic interest rate will lead to a decrease in the demand for local currency and an increase in the foreign exchange rate both in the local and in the international market. Thus, the monetary theory provides a satisfactory explanation of the break in the link between the exchange rate and the transaction flows represents the current accounts of Balance of Payments.

• The Traditional Theory
The Traditional theory gives the exchange rate as the price which seeks to harmonize market forces by bringing into equilibrium the supply and demand for home currency in exchange for foreign currency arising from international transactions. This theory suggests that the traditional practices of exchange rate in a particular country will have far reaching effects on the foreign exchange stability in the International market. These practices which the central bank of Nigeria may not even know the consequences of such inherent policies and customs have far reaching effects on the stabilization of the Naira in the international market. The interest rate in Nigeria for many years has been increasingly high and pegged at 16 % for any business transactions. This has discouraged many Small and Medium-sized Enterprise owners from borrowing money in the banks so as to start their own personal businesses. Local production has been reduced to the barest minimum because of the interest rate and this has also definitely increases the exchange rate in the foreign exchange market(Isard 2007). The high interest rate has also reduced the level of exportation in the Country which has also resulted in the fluctuation and instabilities in the exchange rate. The foreign exchange rate issues are very much intertwined and the underlining issues basically are the problems of excessive demand for a particular foreign currency above the demand for a local currency (Holord 2000). This places a surge on the level of importation and decreases exportation to a great extent since nothing much is being produced just like the case of Nigeria where the Country depends largely on importation of foreign good.

2.7.5 The Flexible Price Monetary Theory
Naime(2008) explained the flexible Price Monetary and illustrates how a sudden change in the supply and demand for money affects the exchange rate both locally and internationally. We will explain this theory using a two country global economy with typical example of the United States of America (a foreign country) and Nigeria (a domestic country). If the money demanded of foreign exchange in the United States of America exceeds that of the demand for foreign currency in Nigeria, then the instability will be more in the foreign exchange of United States that in Nigeria. The theory proposed that a flexible price monetary policies should be adopted by the different countries of the world where there good developmental agenda is their priority (Kuttner, 2001).
The Central bank of Nigeria established the Monetary Policy Control (MPC), many years ago to control and regulate the inflation rates, interest rate and provide necessary guidiance and regulation to all foreign and domestic transaction. The MPC meets every quarter so as to review the activities of the economy in the foreign exchange market internationally. The members of the MPC are most time high ranking officers in the Central bank and often subject to the confirmation of the parliament which is the Senate in this case. Political reasons and power play among the elites have subjected the Nigerian economy to ridicule because the Senate refused to screen the members of the MPC. The monetary policy control could not hold the quarterly meeting for a very long period of time as a result of tis impasse and this greatly affected the economy negatively. This and many more has affected the activities of the foreign exchange regulatory bodies in recent years in Nigeria(Oluwole 2012). The federal government has however woken up to its responsibilities of providing adequate attention and the details of the exportation rates and also the importation so that the demand for the foreign exchange will be very minimized and that will make the manufacturing of local content to take its root in the Country and the Nigeria Naira will once rise again as against the way it is now when compared to the other foreign currencies of the world( Oluche 2011)
.
Figure 2.4: Decline in Capital inflow in Nigeria
Source: www.nbs.org

2.7.6 The Asset Approach Theory
This theory emphasizes the need the financial assets markets over the traditional model of exchange rate adjusting to international trade in goods and which makes the exchange rate reviewed in terms of the financial asset(Philip,2002). Exchange rate changes every minute as supplies of and the demand for the financial assets of different countries of the world changes. The underlining principle of this theory is that the exchange rate should be more valuable in terms of the assets of the country. A country like the United States now with a large population of 250 million people is endowed with a lot of assets and the citizens of the Country have fully maximized their potentials thereby making the country one of the richest on the face of the Earth. Referring to the exchange rate for the case of the United States, the currency is stronger because of the asset of the country and not just the population.
Hymer (2001) opined that the foreign exchange stability and strength of a particular country is driven by the level of assets both human and financial that is embedded in such a Country. In the case of Nigeria, the country is deeply blessed by Natural resources and great potentials both human and capital, but over the years the level of mismanagement and corruption has reduced the assets of the country to the zero level and the foreign external reserve has been depleted due to the economic problem and the instability in the foreign exchange. The International communities are very well aware of the asset drain in the Country and that is why the international community and many foreign investors have declined to have anything to do with Nigeria in terms of the Foreign Direct Investment (FDI). Many of the investors have even backed out initial plans and programs to establish a viable business in Nigeria (Moosa 2002).
This theory placed a great emphasis on asset as a Nation that wants to have a strong economy. The asset here is not only in terms of capital and other tangible things, the asset is also in terms of the human capital that should be more harnessed in all sense of responsibility and awareness. Nigeria and other developing Nations of the world should see that their improved foreign exchange market is greatly tied to the level of asset possessed by them in terms of both the physical ones and the greatest of them which is the human (Ajakaye 2002).
The point of emphasis in this theoretical framework is that Nigeria as a country needs to step up its game in terms of the exportation of goods and services and should seek to increase the exportation of goods and services to the other Nations of the world if the foreign exchange market will really be stabilized. Medical tourism and education are the two basic things that affect the instability of foreign exchange in a Nigeria, which can be fixed if there is enough political will to fix it because a large chunk of the foreign exchange is being serviced by these medical and education bills. The president of the country is presently not around in Nigeria because he has gone to seek medical attention overseas and there are so many more cases like the President’s own. This has put a lot of pressure on the foreign exchange market.
The issue of education is another major case where a large chunk of foreign exchange is been spent. All this unnecessary demands for foreign exchange can be reduced if the Nation’s infrastructural deficit can be fixed, so that the demand for foreign currencies will be reduced sporadically.
The problem of inflation whereby Large amount of money is used to purchase few available goods and services and that leads to a very weak foreign exchange market. The purchasing power of the citizens has reduced drastically and this has restricted manufacturing and local production to a great extent, with this there is an increased demand for foreign currencies and the fluctuation and instability of the exchange rate has been enhanced.
The purchasing power theory also determines the suitable equilibrium exchange rate at which Countries should regain their monetary standard. This theory can be divided and explained into two basic forms which are the absolute form and the reactive form. The absolute form which elucidated on the point that the exchange rate should be equal to the general income purchasing power with regards to the price of domestic and foreign commodities.
On the other hand, the reactive form explains that the change in the exchange rate when measured from a base year will reflect the relative rates in two Countries. In Practical terms, there are many challenges will encounter in inferring the equilibrium speed of adjustment between the duo of the asset markets and the good markets. We are also daily faced with the problem of selecting the appropriate price index in determining the exchange rate.

2.8 Effects of Foreign Exchange Market on Key Macroeconomic Variable in Nigeria
The fluctuations in the foreign exchange market have had an effect on the Macro-economy subject to the performance in Nigeria. The instability and fluctuations in the exchange rate has affected the economy of the country to a very great extent and some of them will be highlighted in this section of the work.

2.8.1 Exchange Rate
When there is a massive capital outflow as it has been in Nigeria in recent years in the case of risky currencies, the local currencies value is expect to depreciate to a large extent because of the increase in the demand for foreign currencies. On the other hand, if there is a massive capital inflow into the country, there will be massive increase in the foreign exchange of the Country and the exchange rate will be stabilized to a large extent. The currency of the domestic country is expected to increase anytime the capital inflow into the country increases.

Figure 2.5: Exchange Rate variations in Nigeria
Source: www.cbn.org

2.8.2 Gross Domestic Product and Growth.
The pressure and the fluctuation in the country often affect the gross domestic product of that particular Country. Increase in the demands for foreign currency above the demand for the domestic currency will reduce production and manufacturing to a great extent. The Gross Domestic Product in many Countries of the World reflects the actual growth and sustainability of such economies because of the stability of the foreign exchange rate in relation to the other currencies. In Nigeria, the rate of importation is definitely high and exportation is at its minimum, which definitely has made many citizens to have an increasing need for foreign exchange. The growth level has been seriously affected because most investors have stopped business activities due to the problems of unfavorable conditions, deficit infrastructures and security challenges across the Country.
The GDP has also been reduced because of high level of increase in the demand for the dollar over the Naira. Efficient measures must be taken to rescue the Country from a monolithic economy and an import-dependent economy. The causes of the pressure on the foreign exchange is basically because of these factors and that is why the currency has not been stabilized, both locally and internationally.

Figure 2.6: Decline in growth of the GDP in Nigeria
Source: Central Bank of Nigeria

Figure: 2.7: GDP growth fluctuations in Nigeria
Source: Central Bank of Nigeria

2.8.3 Inflation
The exchange rate instability and fluctuation affect inflation through the exchange rate channel. A typical situation occurs where a surge in the capital inflow leads to a nominal exchange rate appreciation. The foreign exchange of a country can be largely affected by the issues of inflation in the Country. Inflation occurs where a large amount of money is used to exchange few available goods. In Nigeria, the rate of inflation has affected the Nigerian economy as the foreign the foreign exchange market has been greatly affected. The activities of the manufacturing sector has been greatly affected due to the instability in the foreign exchange market and the massive outflow of capital out of the Country. If the Country has a strong export sector, competitiveness of export goods may improve.
However, a high import demand would lead to a high transfer of foreign prices and causes to domestic economy worsening the value of the domestic currency.The situation in Nigeria is peculiar because of the high level of exportation in the Country.

Figure 2.8: Inflation Rates in Nigeria
Source: www.nbs.org

Increase Inflation Rates in Nigeria
Source: www.nbs.org

2.9 Management of Exchange Rate Pressure.
The problem that most developing Countries of the World face, especially the ones that are having instability in with the stability with its currency in comparison with other currencies is that the indices and parameter that supports the stabilities of such currencies are not well managed. The drive behind an effective economy in any Country of the world is the best policy framework and plan that stimulates the economy in a broad scale. It is when some or all of these parameter values are not working that the foreign exchange begins to be very defective and largely dysfunctional for a particular country. We plan to analyze some important managerial measures, procedures and solutions that can help Nigeria to adequately cater for the deficiencies in this foreign exchange market and ensure adequate stability. It should be stated with great caution that the managerial cautions provides some degree of stability in terms of the foreign exchange market in a peculiar Country as the permanent and lasting solution to the problem is to reduce the importation of goods to the barest minimum and increase the exportation to other Nations of the World so as to decrease the demand for the foreign exchange in the particular Country.

2.9.1 Rationale for Management of Exchange Rate Pressure
In a floating exchange rate system, the exchange rate is that rate that equates the market demand and the supply for currency in the foreign exchange market. As we have it in the free market economy, the government does not fix the price of the exchange rate, but the forces of demand and supply interplay in a way to regulate the exchange rate price. In the case of Nigeria, the government initially does not fix the exchange rate, but the demand of forces and supply intervenes to regulate the prices. However, in the year 2016 when the exchange rate became so high and rate of depreciation of the Naira to the dollar was much, the CBN made some interventions at fixing or regulating the price of the exchange rate.
The Central bank has made many interventions majorly aimed at stabilizing the market and it has yielded some positive results. When the foreign exchange market could to longer regulate itself, the CBN start to pump Millions of dollars into the market on a weekly basis. The rationale behind this is to increase the circulation of the foreign currency in the market so as to meet the increasing demands of many people. Many analysts have, however argued that this method of pumping local currency to the economy is not sustainable in the long run and that it will have a very big effect on the economy. The Central bank may have some of these foreign currencies and it may be easier for them to pump out some of these monies, but it posed a great threat to the foreign external reserves. These monies should be going directly into the foreign reserves so as to lead to a great improvement in the lives of the citizens, but the monies are being used to supplement the foreign exchange which is just like the foreign exchange.
The best and most suitable way to strengthen the dollar is to come up with formalities to increase local and domestic production in the Country so as to radically decrease the importation of goods. Importation of services can also decrease if there is enough training for the domestic skilled and unskilled workers so that hiring workers and personnels from other countries of the world will decrease if the local people can do the same thing
A typical illustration is in the issue of road construction,where Nigeria government through the Minister of power works and housing brings in at every point in tine expertise from across the world at every time there is need or local/domestic production when actually the local workers can be effectively trained to do the same work thereby reducing the importation of devices.

• The Roles of Monetary Policy Committee in Nigeria
The Monetary Policy Committee is a board set up by the Central Bank of Nigeria to control and regulate Foreign exchange business and activities in Nigeria.The MPC consists majorly of senior staffs of the Central Bank and it is being chaired by the governor of the Central Bank. One of the major reasons why the MPC is in place is to stabilize the fluctuations in the exchange rate. Future exchange rate possess the capacity to affect the returns on investment on the foreign direct investment and international investments and it is therefore pivotal to the profitability of an international business deal.Investors are daily faced with the questions of how the profitability of a particular business venture will be and it becomes more complex when the fluctuations in the exchange rate comes to bear, that is why a regulatory body like the MPC is empowered by law to perform its constitutional role to stabilize the Foreign Exchange market.

2.10 Survey of Related Works.
In today’s changing world of global warming, climate change, refugee crisis, economic recession, war, conflict, cyber crime, water crisis, gender inequality, terrorism, pollution, starvation, hunger and disease It is believed that more than 450 million workers around the globe(Darrell, R. Jobman 2006). Acknowledge that the forex market contributes to business development in Today’s business market. He said we live in a world where terrorist attacks can occur at any time and place. And this can be a big threat of nuclear power, oil, human rights and many other issues and also it threaten to disrupt trade and also economic relationship and this can also reduce the labor cost. Traders cannot express their investment concerns about these issues. Forex is the only instrument that incorporates all of these areas of potentials concern and serves as a distinct asset class for speculators and also markets such as equities or interest rate tend to be traded locally during the business day in their own time zone. Forex is an asset that is truly a global investment reflecting every economic development on earth. This is related to my research because it influences traders to have a stable business trading online without any doubt or fear. But I believe things can get better if the situation of the attacks stops, if securities and corruption of countries are locked forward to in marking it better. in that way the forex market trader will have more confident in moving around and investing more to their businesses, and also to withdraw money from banks without thinking someone might still the money or think of explosion of bomb etc. I would just want to see all this discouragements are stopped.

(FOREXWALKTHROUGH, 2008). reviled that Forex has fewer rules unlike the other online businesses and any central governing body does not control it, and there are no clearing houses to make sure the party you are buying the currency from actually pays up. There are no commissions; there are no exchange, brokerage or clearing fees in FX market. You can trade whenever you want, forex markets are open 24 hours a day, there’s no limit to how much currency you can buy and it is easy to get in and out, I mean you can buy and sell currencies with click of a button, instantaneously. I find this article related to my work because it shows how different FX market is from other online markets. It shows that it’s easy to make trades on the forex market, it’s not something you have to go learning like driving a car it’s a simple proceeded and I believe this makes it actually different from other online markets.

(Matt, C. 2011).Stated the resulting collaboration of FX traders is a highly liquid, global market that impacts businesses around the world. Exchange rate movements are a factor in inflation, global corporate earnings and the balance of payments account for each country. FX market contributions to today’s development to the extent that it has positive effects on global economy. In some cases FX contributes as well in building a country’s economy by allowing traders to move back money into your countries as the spread between foreign yields and domestic yields narrows and this may result in a broad decrease in global equity prices. There for, I find this article very useful because that it shows that FX market is a big influence to business development by contribution on building an economy stronger and also contributes in terms of gaining a country’s capital, which is really good, because building an economy is a huge success especially to a developing nations.

(Boris, S. 2013). (forex) market is different unlike the stock market. (forex) is not controlled by any central governing body because it is on its own. Trading is not done against your wish, trading is done when and where you want it. Nobody can force you to make a trade or open a trade; you do it on your own will and time. Before any trading is done all the member’s must trade only based on agreements and also when trading with FX you don’t have to be with the person your trading with in other for the trade to be successful, you can be at home and make your own trade. One of the best things about FX is that whenever you notice that there’s a massive downfall on the trade you are presently is, then you have the power to short the pair at your will and also there’s no limit you could buy or sell $100 billion worth of currency if you have the capital to do it. This article is related to my research because it also talks and shows how different the FX market is from other markets. In other way, it tells you what exactly you’re going into, it shows why it’s unique and why people should choose the forex.
 
(THE MAIN ADVANTAGES OF FREX, 2011). Reviled the reason why People go into FX market because it has no middleman and it is also having lower transaction costs up to 0.1% under normal market conditions, it works 24 hours In FX market is so huge that no single entity can control the market price for some period of time. It has high liquidity this means that where ever you are as long as there is internet connection with just one clicks of your mouse or mobile device you can buy and sell at any time you want because there are people who are always ready to trade with you. FX has low barriers to entry; a lot of people think before you start FX you must have huge capital but no you can join FX with little cash like a $100 minimum. FX also offers demo account this account allows you to practice trading and build your skills. All these advantages influence a lot of people to join FX market and when they join it contributes to business development by building the economy. And I believe it is a reason enough. Because after finding out that there is no middle man it’s a huge turn up, because mostly when people here about middle men all they start thinking is money, thinking maybe there some amount of money you need to pay and so on.
 
(Selwyn, G. 2009). Identified that When making a right decision on FX market they are some guide lines on how to make the best decisions for example when u choose your time frame it’s advisable to find a consistent methodology. Sometimes traders like to buy and sell resistance while others prefer to buy and sell breakouts etc. after chosen your methodology it’s advisable to test it to see if it works on consistence time and provides you with an edge, even if it’s a small one. If you keep getting a positive feedback like your profits is more than your losses, then chances are very good that you are wining. Then you may use other strategies as well gradually and see if you are having positive feedbacks as well. This article shows that in FX market they are guidelines that show and teach you how to make right decisions when trading and also shows how and when to apply it.

CHAPTER 3
METHODOLOGY

3.1 Research Methods
This chapter gives a comprehensive description of methodology for the collection and analysis of data. It explains the design, study population, sampling design, sample size determination, research instrument, validity and reliability of the instrument, administration of the instrument and statistical data analysis methods. A research method is the way data is collected while a research design provides the framework for the collection and analysis of data. In this section of the work, we will come up with the proposed research method and also the research design. The methodology contains the crux of the entire research work. The methodology that we employed in this research work is very central to the work itself and its usefulness cannot be undermined.

3.2 Research Design

This study will employ survey research to investigate and In this empirical enquiry the researcher will not manipulate the Mixed – Qualitative and Quantitative research design basically suits well to this research. Taking into consideration that qualitative method directed to gain an understanding of underlying reasons and motivations and to provide insights into the setting of a problem, generating ideas and/or hypotheses for later quantitative research (Snap Surveys, 2015). This is exactly what I have to start my research with. All sides of the research question will be analyzed and the problem of knowing to why the forex market affect the exchange rate of Nigerian economy will be deeply detailed, reasons and stages will be determined which will lead to quantitative design on the other side of research. Under quantitative design the incidence of various views and opinions in a chosen sample will be measured, statistical data will be provided with additional survey, which will also take place in research. It will bring more evidential support to research in general.

3.3 Adopting a Quantitative Research Method

Quantitative Research Method was adopted for this work through the administering of questionnaires. This research will be a Case Study, because it enables to study a single case in depth, over an extended period of time will be exactly identified in this research topic. And will be used to address the first objective of the study. The primary data will be sourced using questionnaires and will be used to address the remaining objective. Primary sources of data were used for this research work. Questionnaires were also administered to the business people in the foreign exchange market in Nigeria so as to efficiently make analysis and conclude.
Primary sources of data were used in the course of this research work. This is the pillar of this research work as it takes the research work from just a theoretical work to an actual realization… The analysis was done in chapter four and it was computed appropriately and efficiently.
Adopting a Qualitative Research Method for the Work
This research method will embrace a quantitative because we are interested in the outcome and in testing the hypothesis. Questionnaires will be used in the collection and analysis of data because we are interested in the outcome. A qualitative research is the one that emphasizes quantification in the collection and analysis of data. We want to adopt a quantitative research

3.4 Data Collection Method.
                  
Primary data will be used for this study. The primary data will be sourced using questionnaires. The data collected by questionnaires and oral interviews were presented in a table. The collected data were analyzed through percentage and inferential statistics. We will test the hypothesis of this research work using the Chi-square (x2) distribution so as to ascertain the acceptability or the deviation of this hypothesis. The calculated values will also be compared with the tabulated values.
The null hypothesis will be accepted when the calculated values are less than the tabulated values and the alternative hypothesis is accepted on rejection of the null hypothesis.

3.5 Reliability and Validity of the Data Collection Instrument

The instrument will be given to the researcher’s supervisor to ascertain the face and content validity of the instrument. Items not suitable as identified by the researcher’s supervisor will be removed or modified based on the comments by the researcher’s supervisor. A pilot study will be carried out using 10 respondents in order to test the reliability of the instrument. Using Cronbach Alpha method at 0.05 level of Significance, the researcher will be able to ascertain the internal consistency of the items in the questionnaire. Thus the coefficient of reliability above 0.8 will be considered appropriate to judge the reliability of questionnaire items. Co-efficient above 0.8 indicate that the items in the questionnaire are reliable. The reliability test will be performed using IBM SPSS data analysis software.

3.6 Study Population

The Population of this study consists of the 3 million youths within the age bracket of 15 to 35 years (Gaskia, 2014). The target and the demography of the population include youths with different gender, the criteria for participant inclusion the Nigerian youth living in Abuja. The criterion for participant exclusion is a Nigerian outside the age bracket of 15 to 35 years.

3.6.1 Sampling Frame

The sample will be taken from Abuja in Nigeria using random sampling to avoid research bias and to give every member of the population an equal chance of been selected.

3.6.2 Sampling Technique/size

In this study, random sampling method will be used to choose respondents without bias but based on purpose of the study. The sample size was determined using the Tara Yamane formula as follows:

Where:
n = Sample Size
N = Elements of population
e = Error of sampling, in this study is 5 percent
A total of four hundred (400) respondents will be selected using the formula.

3.7 Ethical Consideration

To recruit participants for the study, permission will be formally sought from the conveners of youth gatherings in public places, the authority or supervisors over the participants, guardians or parents where applicable for easy questionnaire administration and cooperation. Informed consent will be obtained from the youths verbally and the purpose of the research will be revealed to them.

3.8 Data Collection.

For the secondary data, statistical descriptive analysis technique will be used. For the primary data, each questionnaire will be inspected for completeness, coded and entered into the computer. IBM SPSS (Statistical Package for Social Scientists) version 20 will be used in entering the data and analyzing it. Analysis will be done at the univariate level to get the frequency distribution, percentage, means and standard deviation as outcome measures the variables. Bivariate analysis using the Pearson Chi-square statistics will be employed to test the hypothesis on the factors responsible for people and the impacts all statistical tests will be carried out at 0.05 level of significan5.0

CHAPTER 4
ANALYSIS

4.1 Results and Discussion

This chapter presents the analysis of the data collected through the use of the researcher-developed questionnaire on the effect of digital trading system in the third world, reference to forex trading in Nigeria. The findings of the study are presented below;
Research Question 1: why does the forex market affect the exchange rate of Nigerian economy?
Table 4.1: Chi-square showing the how forex market affect the exchange rate of Nigerian economy
ITEM
U
D
SD
A
SA
Df
Chi-Square
X2
P
Nigeria major source of revenues accrued from forex market
63
90
137
102
8
3
6.2