Effect of fluctuations in exchange rates – Foreign Exchange Tutorials

What are Fluctuations in exchange rates?

Some of the reasons of fluctuations in exchange rates are as follows:

It could adversely affect this conversion resulting in a lower than expected amount. An import/export business exposes itself to foreign exchange risk by having account payables and receivables affected by currency exchange rates.

Interest Rate: When interest rate in home country is higher than other country, more foreign investor will be attracted to invest in home country to make capital gain. In this case demand for home countries currency will increase and may cause it to appreciate.
Balance of Trade: When in country’s balance of payment the export is greater than importer we call there is surplus. Normally it has been the country which face the surplus there currency value increase than country which make deficit.
The other way to look as it is that when exports are more than imports, more importers will sell foreign currency that received by exporting which increases demand for home currency which results in appreciation of currency.
Money Supply & Inflations: At the time central bank of country will print more money, the supply of money will increase in the market. Which results in increase in purchasing power of customer also and which ultimately increases inflation
Since inflation and currency values are inversely related with increase in inflation currency depreciates.
Foreign Debt: With borrowing comes an obligation to repay the money along with interest. So when a country borrows more foreign debt it needs more foreign currency to repay that loan, which makes it to sell more home currency to buy foreign currency resulting in depreciation of home currency.

Practice Questions

1. What is the effect of fluctuations in exchange rates on international trade?
A) It has no effect on international trade
B) It can make exports cheaper or more expensive, depending on the direction of the fluctuation
C) It only affects imports, not exports
Answer: B

2. How do fluctuations in exchange rates affect the profitability of multinational corporations?
A) They have no effect on profitability
B) They can increase or decrease profitability, depending on the direction of the fluctuation and the company’s operations in different countries
C) They only affect companies that engage in international trade
Answer: B

3. How do fluctuations in exchange rates affect the purchasing power of consumers?
A) They have no effect on purchasing power
B) They can increase or decrease purchasing power, depending on the direction of the fluctuation and the consumer’s currency holdings
C) They only affect consumers who engage in international trade
Answer: B

4. How do fluctuations in exchange rates affect the tourism industry?
A) They have no effect on the tourism industry
B) They can increase or decrease the number of international tourists visiting a country, depending on the direction of the fluctuation
C) They only affect domestic tourism, not international tourism
Answer: B

Answers:

1. B

2. B

3. B

4. B