Exchange Rates Flashcards
What is Foreign currency and why is it good?
Allows us to buy g/s produced in other countries
What is the Foreign exchange market referred to and what is it?
FX market
- where exchange rates are determined
If the exchange rate of $:£ = 2:1 what does this mean? and what happens if it increases and decreases
that £1 gets you $2
- Increase = Appreciation of £
- Decrease = £ depreciation
What happens when there is a depreciation of the pound
Decrease in external purchasing power of the £
- means that British tourist are worse off
Why is the FX market so volatile?
As people aim for profit not just buying goods/ services
What is currency risk?
is the possibility of financial loss due to changes in exchange rates. It can affect investors and businesses that operate internationally
What is a positive to Fx market
Opens different markets
More capital
What are Forward contracts
Avoid currency risk, but locking in future exchange rates for today - agreed rate
Factors that determine a forward rate
Fx market by Supply and demand
Tells us what investors are thinking
When are Forward contracts good?
- If you are less optimistic than the market
- You have more at stake, greater risk
What does demand of pound show us and what happens if it £ depreciates?
That people want our exports/assets
- Demand for pound increases
What does supply of pound show us and what happens if it £ depreciates?
Uk want others exports/ assets
- Supply of pound decreases
Law of demand for pound
Buy £ so people can buy Uk exports/ assets
- demand is downward sloping due to Exports effect
Law of Supply for pound
Demand for imports to buy these we need to exchange £
Supply is upward sloping - import effect
What are the import effects? Positive and negative
economic impact when a country buys goods or services from another country, bringing them into its domestic market
Positive = Higher productivity (machinery), increase in consumption choice, tech advancement, lower production cost
Negative = Trade deficit, job losses, increased inflation (exchange rate flux), reliance on foreign economy
What are export effects? Positive and Negative
refers to the economic impact when a country sells its goods or services to another country, sending them out to a foreign market
Positive = Increase GDP, Diversification, Scale economy, Foreign investment attraction
Negative = Financial risk, trade barriers, competition, cultural difference
