Course: BUS 101
Foreign Currency Exchange Rates
In simplest terms, exchange rate can be defined as the quotation of national currency or the standing of the country’s currency against the foreign ones. Foreign exchange rates can also be explained as the amount of one currency that must be given for the acquisition of one unit of another competing currency. Therefore, it would not be incorrect to say that an exchange rate in fact serves as a conversion factor, or in other words, a ratio or a multiplier. However, it is dependent on the direction of conversion.
Considering the idea of exchange rate from a slightly different perspective, it can also be observed that exchange rate is a “price”. In cases where the exchange rate moves freely, the rate can convert to become the fastest moving price in the world’s overall economy, thereby bringing together all the foreign goods with it.
Importance of Foreign exchange Rate:
The biggest factor that makes foreign exchange important for all countries is its ability to facilitate global commerce. All financial entities such as banks as well as corporations and individuals keep a track of the foreign exchange prior to their agreements for selling and buying of goods and services on an international level. However, it is to be kept in mind that several distinct risks are associated with operating a business in an international environment.
On a national level, the reserves of foreign exchange are maintained in order to influence the national currency rate and for proper economy management.
It becomes possible for a country to export goods at a cheaper rate in if the exchange rate is lower, thereby benefitting the country’s economy. In other cases, if the exchange rate is higher, it will enable the local consumers use imported goods since their buying power is increased. Foreign exchange reserves are frequently used by treasury officials when they need occurs to buy back the national currency from the market which is primarily a step taken to strengthen the value of the currency (D. Evans).
Due to the fact that there are different factors that determine foreign exchange rates, there exist numerous differences in the foreign exchange rates of different countries.
Differences in foreign exchange:
Exchange rates are relative, and are expressed as a comparison of the currencies of two countries. The following are some of the principal determinants of the exchange rate between two countries.
1. Differentials in Inflation
It is a general rule in the economy that a country that