Podcast
Questions and Answers
Explain how a sudden appreciation of the Euro against the Japanese Yen might impact a Spanish business exporting goods to Japan.
Explain how a sudden appreciation of the Euro against the Japanese Yen might impact a Spanish business exporting goods to Japan.
If the Euro appreciates against the Yen, the Spanish goods become more expensive for Japanese consumers, which could lead to decreased sales and profits for the Spanish business.
A UK-based company imports raw materials priced in US dollars. If the British pound suddenly depreciates against the US dollar, how would this likely affect the company's costs and profitability?
A UK-based company imports raw materials priced in US dollars. If the British pound suddenly depreciates against the US dollar, how would this likely affect the company's costs and profitability?
The company's costs would increase because it would require more pounds to purchase the same amount of US dollars, leading to lower profitability.
Describe one strategy a business might use to mitigate the risks associated with fluctuating exchange rates.
Describe one strategy a business might use to mitigate the risks associated with fluctuating exchange rates.
One strategy is to take out insurance to protect against financial loss due to adverse currency movements. Another would be to use financial instruments like hedging.
A US company is considering acquiring a business in the UK. How would a strong dollar influence the cost of this acquisition for the US company?
A US company is considering acquiring a business in the UK. How would a strong dollar influence the cost of this acquisition for the US company?
Explain why a business might choose to adjust prices in the domestic currency as a response to fluctuating exchange rates.
Explain why a business might choose to adjust prices in the domestic currency as a response to fluctuating exchange rates.
Flashcards
Exchange Rate
Exchange Rate
The price of one currency expressed in terms of another currency.
Currency Appreciation
Currency Appreciation
When a currency's value increases relative to other currencies.
Currency Depreciation
Currency Depreciation
When a currency's value decreases relative to other currencies.
Currency Fluctuation
Currency Fluctuation
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Hedging Currency Risk
Hedging Currency Risk
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Study Notes
- The Exchange rate represents the price of one currency versus another.
- A currency can appreciate, that is rise in value, when compared to other currencies; for example, if the pound appreciates against the Euro, then £1 will buy more Euros.
- A currency can depreciate, that is fall in value, against other currencies; as an example, were the pound to depreciate against the Euro, it would buy fewer Euros.
- Changes in exchange rates have a substantial impact on businesses operating internationally.
- If a Spanish business exports goods priced in Euros to Japan, a stronger Euro would increase the cost for Japanese consumers, potentially reducing sales and profits.
- A strong Euro lowers the price for a Spanish business looking to buy a Japanese business, as fewer Euros are needed to buy the required Yen.
- Businesses expanding abroad should consider exchange rates between their home currency and the currencies of their target countries, as well as how the relationship between the currencies fluctuate.
- Currencies fluctuate, that is have changes in value over time.
- The Euro may appreciate one week and depreciate the next.
- Businesses are less concerned about short-term fluctuations than long-term trends.
- Fluctuating exchange rates create uncertainty for businesses due to their unpredictability and potential sharpness.
- For example, after the UK's June 2016 vote to leave the EU, the pound's value dropped by about 15% almost overnight.
- Businesses can protect themselves from adverse currency movements by:
Ways to protect from financial loss
- Adjusting prices in the domestic currency
- Buying insurance
- Buying and selling currency when prices are favorable
- Using financial instruments like hedging.
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Description
Explore exchange rates, representing the price of one currency versus another. Learn how currencies appreciate (rise in value) or depreciate (fall in value) against others. Understand the substantial impact of exchange rate changes on international businesses.
