Abstract
Europe's currency markets have recently experienced a period of turmoil. Some currencies were forced to withdraw from the EMS or to devaluate whereas others in the EMS or within its orbit were only able to resist by pushing short term interest rates to high and somelimes extraordinary levels. At the end of 1992, tension was running high and a mood of uncertainty hung over the market. We believed it was timely to examine the nature and the extent of the exchange rate fluctuations that the EMS is intended to contain and control. This article, primarily designed for practitioners, analyses from a number of angles the ways in which exchange risk materializes either when rales are readjusted or between two readjustments. It makes a number of 0bSe~ationsth at have been limited deliberately to the exchange rates and purchasing power parities of the currencies in the EMS and how they have altered between 1979, when the system was set up, and the recent crisis.