The world relies on the foreign exchange market. Currencies are traded everyday in the FX market to be used for direct foreign investments, import and export needs of companies and individuals, purchases of foreign instruments, managing existing management of transaction exposure is a key operation in cross border businesses.

a) Comment on the various factors that affect the equilibrium exchange rate or price of one currency against another

b) In an environment where exchange rates are very volatile and companies failure to address their foreign exchange exposure can have serious repercussion. Why are exchange rates so volatile?