How Currency Exchange Rates Affect Global Business Essay Example
An exchange-rate system is the set of rules established by a nation to govern the value of its currency relative to other foreign currencies. The exchange-rate system evolves from the nation's monetary order, which is the set of laws and rules that establishes the monetary framework in which transactions are conducted. When one currency is traded for another, a foreign exchange market is established. Multinational corporations are one of the participants in the foreign exchange market.
The business world relies on the foreign exchange market. When buying foreign goods and services or investing in other countries, companies need to purchase the currency of the country where they are transacting business. Currencies are traded everyday in the FX market to be used for direct foreign investments, import and export needs of companies, purchases of foreign instruments, and managing existing positions.
The exchange rates are set based on several basic factors that are consistently applied in all situations. These fixed factors that impact currency exchange rates are generally identified as inflation, interest rates, and trade value. Trade value has to do with the ratio of business and service trading that takes place between the two countries that issue the currency. In the event that one country purchases more goods and services from a given country than it imports to that same country, the value of the each country will reflect that difference. In effect, the country that gains the most from the sale of goods and services between the two countries will have a currency that is rated higher in value. Political turnovers and natural disasters also impact the economic nature of a country and the exchange rates subsequently.
Inflation and recession are economic factors that directly impact the ability of a country to purchase goods and services, both within the country and on the world market. High inflation will mean that the country will be less capable of purchasing
The business world relies on the foreign exchange market. When buying foreign goods and services or investing in other countries, companies need to purchase the currency of the country where they are transacting business. Currencies are traded everyday in the FX market to be used for direct foreign investments, import and export needs of companies, purchases of foreign instruments, and managing existing positions.
The exchange rates are set based on several basic factors that are consistently applied in all situations. These fixed factors that impact currency exchange rates are generally identified as inflation, interest rates, and trade value. Trade value has to do with the ratio of business and service trading that takes place between the two countries that issue the currency. In the event that one country purchases more goods and services from a given country than it imports to that same country, the value of the each country will reflect that difference. In effect, the country that gains the most from the sale of goods and services between the two countries will have a currency that is rated higher in value. Political turnovers and natural disasters also impact the economic nature of a country and the exchange rates subsequently.
Inflation and recession are economic factors that directly impact the ability of a country to purchase goods and services, both within the country and on the world market. High inflation will mean that the country will be less capable of purchasing