explain how a change in exchange rate affected your firm course hero

How does foreign exchange rate affect the exchange rate?

88) Changes in exchange rates A) explain a larger portion of the variability foreign bond indexes than foreign equity indexes. B) do not affect all foreign equity markets equally. C) affect dollar-denominated foreign equity returns, but this risk can be hedged. D) all of the options Version 1 83.

Why does nominal exchange rate increase along with real exchange rate?

Dec 03, 2020 · 2. Explain the effects of the following change in the exchange rate: Originally the $1.50 = 1 Euro; now the $1.20 = 1 Euro a. Is the dollar becoming weaker or stronger? _____ Calculate how this change affected the price of U.S. import and exports: A German camera that costs 200 Euros, what will it cost U.S. buyers in dollars? b.

How do currency fluctuations affect the economy?

Sep 12, 2020 · G11-1 Using shifts in supply and demand curves, describe how a change in the exchange rate affected your industry. Label the axes, and state the geographic, product, and time dimensions of the demand and supply curves you are drawing. Explain what happened to industry price and quantity by making specific references to the demand and supply curves. How can …

How do terms of trade affect the value of a currency?

Economic Exposure: A firm has economic exposure to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm’s position with regards to its competitors, the firm’s future cash flows, and ultimately the firm’s value. Economic exposure can affect the present value of future cash …

Why are exchange rates important?

Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic measures.

What determines exchange rates?

Numerous factors determine exchange rates. Many of these factors are related to the trading relationship between the two countries. Remember, 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. Note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate.

How do interest rates affect inflation?

Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates.

Which countries have low inflation?

During the last half of the 20th century, the countries with low inflation included Japan, Germany , and Switzerland, while the U.S. and Canada achieved low inflation only later. 1  Those countries with higher inflation typically see depreciation in their currency about the currencies of their trading partners. This is also usually accompanied by higher interest rates.

Why is currency exchange important?

Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country's relative level of economic health. A higher-valued currency makes a country's imports less expensive and its exports more expensive in foreign markets.

What is the current account?

The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.

What is terms of trade?

Terms of Trade. A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved.

What factors affect exchange rates?

Numerous factors influence exchange rates, including a country's economic performance, the outlook for inflation, interest rate differentials, capital flows and so on. A currency's exchange rate is typically determined by the strength or weakness of the underlying economy. As such, a currency's value can fluctuate from one moment to the next.

Why do people not pay attention to exchange rates?

Far-Reaching Currency Impacts. Many people do not pay attention to exchange rates because rarely do they need to . The typical person's daily life is conducted in their domestic currency. Exchange rates only come into focus for occasional transactions, such as foreign travel, import payments or overseas remittances .

What is the effect of weak currency on trade?

A weak or strong currency can contribute to a nation's trade deficit or trade surplus over time.

What are the two types of capital flows?

There are two types of capital flows: foreign direct investment (FDI), in which foreign investors take stakes in existing companies or build new facilities in the recipient market; and foreign portfolio investment, in which foreign investors buy, sell and trade securities in the recipient market.

What happens when currency is devalued?

A devalued currency can result in "imported" inflation for countries that are substantial importers. A sudden 20% decline in the domestic currency could result in imports costing 25% more, as a 20% decline means a 25% increase is needed to get back to the original price point.

What is the importance of exchange rates in monetary policy?

As mentioned earlier, exchange rates are a key consideration for most central banks when setting monetary policy. In September 2012, Bank of Canada governor Mark Carney said the bank took the persistent strength of the Canadian dollar into account when setting monetary policy. Carney said the Canadian dollar's strength was one reason why his country's monetary policy had been "exceptionally accommodative" for so long. 1 

What is the most traded market in the world?

The forex market is the most actively traded market in the world, with an excess of more than $5 trillion traded daily, far exceeding global equities. 2  Despite such enormous trading volumes, currencies usually stay off the front pages.