Exchange Rates

Last updated Jun 30, 2023 Edit

• Business

An exchange rate is the price of one currency expressed in terms of another currency. The exchange rate determines how much of one currency has to be given up in order to buy a specific amount of another currency.

• Price of exports in international markets
• Cost of goods bought from overseas
• Revenues and profits earned overseas
• Converting cash receipts from customers overseas

Strong Pound Imports Cheaper Exports Dearer

• Increasing demand for exports results in higher demand for currency
• Lower demand for imports results in lower demand for currency
• Speculation - traders may bet that the exchange rate will rise
• An increase in interest rates - making it more attractive to hold the currency
• Foreign direct investment into the country leads to higher demand fro currency

• The amount of one currency that can be purchased for another currency.

• If the demand for payments in one currency increases, then the value of that currency would increase, whilst the opposite is also true.

• Higher demand for exports
  • If one country has highly desired export demands then their currency is likely to increase in value
• Trader speculation
  • If traders believe that the value will increase, then they will buy the currency up and that will lead to an increase in value
• Foreign investment
  • Foreign investments into the country leads to greater demand

• If the value of the pound against the dollar rises, then prices of exports to America rise and prices of imports from America fall.
• if the value of the pound against the dollar falls, then prices of export to America fall and prices of imports from America rise.

• They could use local suppliers as much as possible, reducing the impact as much as they can on tariffs and exchange rate fluctuations.

• It might not be viable for a firm to get a certain material locally, as it may either be much cheaper to import from an external supplier or it may be a natural resource that can only be extracted in certain regions, outside of the country.

Business