The Impact of Exchange Rate Changes (CIE IGCSE Business)

• An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18
  • International currencies are essentially products that can be bought and sold on the foreign exchange market (forex)
     
• The Central Bank of a country controls the exchange rate system that is used in determining the value of a nation's currency
  
  
• Exchange rates are an important economic influence for businesses that  import raw materials and components, and for businesses that export their products
   

• The value of a currency changes over time
  • When global demand for the currency rises, the currency appreciates 
    • Appreciation occurs when the value of a currency rises, e.g. £1 = €1.18 goes to £1 = €1.25
      • Europeans buying goods from the UK now have to pay more in euros than they did previously   
      • This appreciation makes exports from the UK relatively more expensive and imports less expensive
        
        
  • When global demand for the currency falls, the currency depreciates
    • Depreciation occurs when the value of a currency falls, e.g. £1 = €1.18 goes to £1 = €1.05
      • Europeans buying goods from the UK now pay less in euros than they did previously 
      • This depreciation makes exports to Europe relatively more attractive and imports less attractive
        
        
• Changing currency values can have a big impact on the business costs and sales revenue of MNCs

• The extent to which businesses are affected by currency fluctuations will depend upon the volume they are importing or exporting and the countries with which these transactions take place
   
• Exporting businesses benefit from currency depreciation, whilst importing businesses benefit from currency appreciation
  
  

The Impact on Business of Currency Appreciation & Depreciation