Exchange Rates
International Trade & Globalisation · 4 question types
Before looking at how the rate is set, it helps to know who is buying and selling currency, because every reason to buy one currency is a reason to sell another. The syllabus lists six main reasons.
- Trade in goods and services. An importer must pay foreign firms in their currency, so it sells its own currency to buy theirs. Foreign buyers of a country's exports do the reverse, buying that country's currency to pay for the goods.
- Investment in capital goods between countries. A firm building a factory abroad (foreign direct investment) needs the host country's currency to pay for land, machinery and labour.
- Payment of profit, interest and dividends between countries. Profits earned by a firm operating abroad, and interest or dividends paid to foreign investors, have to be converted into the receiver's currency.
- . Migrant workers send part of their wages home, converting the currency they earn into the currency of their family's country.
- . Traders buy a currency they expect to rise and sell one they expect to fall, hoping to profit from the change in its value.
- Government intervention in currency markets. A central bank may buy or sell its own currency to influence the exchange rate.
Identify reasons for buying or selling a foreign currency (2 marks)
What comes up: a 2-mark "Identify two reasons why a firm or individual may buy foreign currency."
Write (two marks): give any two distinct reasons, each stated clearly. Credited reasons include: to pay for imported goods or services (1); to invest in assets or build a business abroad (1); to pay profit, interest or dividends to people in another country (1); to send remittances to workers' families abroad (1); to speculate on a rise in the currency's value (1).
Watch out: "to make money" on its own is too vague; name the activity (importing, investing, speculating) that creates the need for the foreign currency.