Understanding Exchange Rates

One needs to have a base level understanding of what defines an exchange rate. According to Investopedia, a foreign exchange rate is “The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.”(Investopedia, 2012) The process by which foreign exchange rates are determined is really not any different than any other

Foreign exchange rates are best described as simply the price of a country’s money expressed in another country’s money. In simple words, it is the rate at which a currency can be swapped for another. An example of determining foreign exchange rates is by substituting goods for currencies. Another example is the yuan-dollar exchange will depend on how well the demand and supply moves. When the demand for dollars in China climbs and supply does not go up correspondingly, each dollar will cost more yuan to buy. (Colander, 2010)

Look a little from all sides, foreign exchange rates vary. Why is it so? Well profits easily. It is not because of the small people who have a

8. How can a central bank peg the value of its currency relative to another currency?

4. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, a HK$ =

Exchange rates are the important tools in the global economy. The exchange rate activity will affect the price of every country’s imports and exports, as well as the value of every overseas investment. A weak currency makes exports cheaper to foreigners, which can lead to higher exports and job creation in the export sector. Consumers use exchange rates to calculate the cost of goods produced in other countries. How much a currency is worth in relation to another currency is determined by the supply and demand for currencies in the foreign exchange market. Following the global financial crisis of 2008-2009, tensions among countries over exchange rate policies arguably broadened. Some policymakers and analysts have expressed

?The increased importance being attached to exchange rates is a result of the globalisation of modern business, the continuing growth in world trade relative to national economies, the trend towards economic integration and the rapid pace of change in the technology of money transfer.? (Copeland, Laurence S. 2014). In 21th July 2005, Chinese authority announced that the exchange rate system changed, from the dollar peg to the floating basket peg system. Recently, since the volatility in the forex market is growing, which makes there is increase concern about forecasting of exchange rate movements. (Schnabl, 2008).

In the literature we identify three types of exposure under floating exchange rate system; economic, translation and transaction. Translation and transaction exposure are accounting based and explained in terms of the book values of assets and liabilities denominate in foreign currency value. Economic exposure is the sensitivity of company value to exchange rate fluctuation. At the corporate level, changes in

Finance plays and important role in our day-to-day routine. Considering the value of money, countries and people have started investing them into other countries and shares. Investing money in other countries is principally dependent on currency exchange rates.

First of all, we believe that the exchange rates can be affected by political decisions. For example, the

The depth and intensity of exchange rate volatility and its impact on the volume of international trade was recognized during 1970s when the world economy shifted from fixed exchange rate to free floating exchange rate. The hypothesis may be that if the exchange rate volatility is higher then it will generate uncertainty of the future profit from

While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exp0rters and importers.

exchange. A foreign exchange rate is the price of a country 's currency in terms of another

The currency exchange rate is one of the most important elements of a country’s relative level of economic health and can be affected by many factors. The factors are differentials in inflation, differentials in interest rates, current-account deficits, public debt, terms of trade, political stability and economic performance.

“Exchange rates are the amount of one country’s currency needed to purchase one unit of another currency (Brealey 1999, p. 625)”. People wanting to exchange some money for their vacation trip will not be too much bothered with shifts if the exchange rates. However, for multinational companies, dealing with very large amounts of money in their transactions, the rise or fall of a currency can mean getting a surplus or a deficit on their balance sheets. What types of exchange rate risks do multinational companies face?