Exchange Rates

What is an exchange rate?

• It is the price of one country's currency expressed in terms of another country's currency. It's an important factor in international trade because it determines the relative prices of goods and services when exchanged across borders

What is the significant impact on businesses?

• Cost of imports and exports

• Competitive advantage

• Profitability

What is the Cost of Imports and Exports?

• A company's import or export costs can change when exchange rates fluctuate. For example, if a company's home currency weakens against the currency of its supplier country, the company's costs for imported goods will increase

What is the Competitive Advantage?

• A favourable exchange rate can give a company's goods and services a competitive advantage in international markets

What is Profitability?

• A company's profits can be affected by changes in exchange rates, as exchange rate movements can affect the cost of goods, the demand for the company's products, and the value of profits earned in foreign currencies

Causes of changes in exchange rates:

• An increase in Exports increases demand for a currency

• Reduction in Imports - decrease the supply of currency

• High Interest Rates -attract savings from abroad

• Speculation against a currency

• Investment by Foreign Companies

• Government support to a currency to maintain its' value against other currencies. The Central Bank increases interest rates. Note here that the US Central Bank Interest rate (Federal Reserve) influences the rates set by other Central Banksits