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Understanding Exchange Rates And Their Impact On Management Financial Decisions.

3021 words - 12 pages

Understanding Exchange RatesSection I - IntroductionSection II - Definitions and ExamplesSection III - Systems and HistorySection IV - Government Interventions and their EffectsSection V - Effects of the Exchange Rate on International Trade RelationshipsSection VI - Other Related International Trade ConsiderationsSection VII - ConclusionSection I - IntroductionUnderstanding the relationships among world currencies is vital to successful operations in a global economy. There is money to be made by managers who can effectively manage exchange rates in the course of their business dealings. There is money to be lost by managers who fail to recognize the significance of these rate relationships.In an effort to better understand the affects of exchange rates, we need first to define the term exchange rate. This will require looking closely at the relationship between the exchange rate and global trade. We then need to discuss how these rates are determined and who sets the rate for each country. Then we will examine the impact of these rates, both good and bad. While examining the impact of exchange rate fluctuations we will complete cost comparisons of similar goods in the U.S. and in foreign markets and discuss the effect of rate changes on the international market. This will provide us with the opportunity to discuss some of the problems caused by exchange rate fluctuation and review how trade and national economies can be affected.With these discussions and reviews, we should be able to define and explain the exchange rate in layman's terms using everyday examples to demonstrate the differences in exchange rate and the potential for profit and loss as exchange rates fluctuate. The processes involved and the consequences of exchange rate fluctuations can be confusing. The importance of understanding at least the basics of exchange rates and international trade rules cannot however be overstated. The success or failure of individual investors, large corporations and even governments can be determined by accurately calculating and adjusting practices according to currency relationships.Section II - Definitions and ExamplesThe foreign exchange rate is the price relationship between the currencies of two countries. It is defined in The Manager in the International Economy as "the price at which the country's currency is exchanged for the currencies of other countries." That sounds simple enough but to clarify; let's look at a few examples, using this theoretical table.Using this chart, you could expect to trade 73 U.S. dollars for 86 French francs. To simplify this exchange, let's consider a visit to our neighboring Canada. When you cross the Canadian border from the U.S. you can exchange one U.S. dollar for about one Canadian dollar and thirty cents. That is the spot rate or the rate at which the currencies are currently trading. This rate is used by vendors near the border to make simple exchange of your U.S. dollar for Canadian dollars. If you eat...

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