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Exchange Rate

Autor:   •  July 30, 2012  •  Essay  •  820 Words (4 Pages)  •  1,073 Views

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Exchange Rate

The foreign exchange market is a platform where the currency of one country can be converted in to that of another country. However it may be difficult for a business to plan ahead if they are not sure what the exchange rate will be at any one time. Secondly changes in exchange rates affect the demand for both imports and exports because they change the apparent price of both imports and exports. Businesses of all shapes and sizes may have to trade with other businesses and customers from around the world. In doing so, they do one of two things; either they sell goods and services abroad for which they will receive payment, this is called an export, or they buy goods and services from abroad, in which case they will have to pay for those goods and services, this is called an import. It is also important to remember the following, for businesses trading abroad who are both buying imported goods in and selling to foreign markets, the position can get very confusing especially if you are dealing with a number of different countries. For importers the problem is that exchange rates affect their cost of production, which will in turn have an impact either on the price they have to charge customers or their profit margins. Two for exporters changing exchange rates may lead to a rise in the demand for their products or make it much harder for them to be able to compete in foreign markets. Additionally government can play a part in how the currency exchange rate affects global business as well. Many governments will put into place certain actions that will purposely devalue the value of their own dollar. One would say why would they do this? It seems counterproductive, but actually it isn't.

By deflating the value of their own dollar that country will cause an increase in the demand for their supplies, kind of like when a store puts on a sale and attracts a crowd to their store. A few years ago a struggling Brazil did just that, they devalued their currency. As a result they attracted a plethora of foreign investors to their country. Many foreign businesses invested in Brazil's retail market, manufacturing companies, construction, tourism, banking, communication companies and many other industries which boosted Brazil's economic system. Today, Brazil is benefiting

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