Unit 26
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Exchange rates are vitally important to
businesses and consumers. Many people take
foreign holidays, having to buy currency. If you
went to Spain or France you would have to buy
Euros, if you went to Florida (USA) you would
have to buy American Dollars.
The EXCHANGE RATE is the amount of another
currency that you can buy with £1.
For example if the exchange rate is £1 = €1.20,
you will get €1.20 for £1.
The British pound is also called sterling or
pounds sterling
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What is the exchange rate today?
How many currencies are you shown?
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To calculate the cost of a foreign exchange you
need to know the exchange rate, it is calculation
the amount in £’s by the exchange rate for the
other currency.
EG if a French customer has to pay for £1000
worth of goods and the exchange rate is €1.20
then they will have to pay €1200 (1000x120) to
get the £1000.
If an American company ordered £20,000 of
materials at the exchange rate of $1.50 then it
would cost them $30,000 (20,000x1.50).
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The exact price of foreign exchange currencies
goes up and down on a minute by minute basis.
Around the world firms need large currency to
carry out their business and there are specialised
markets that deal with foreign exchange
transactions on behalf of banks and businesses.
Banks and other foreign exchange dealers are
buying and selling currency 24 hours a day.
Changes in one currency can affect the exchange
rate of others, therefore IMPORTS and EXPORTS
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If the exchange rate to US Dollard is £1 =
$1.50 then £1000 of orders will cost the
$1500, but idf the exchange rate of the £
drops to £1 = $1, then £1000 of orders will
cost $1000...So..
If the value of the £ drops then the price of
goods will drop for foreign customer, good
for them – bad for UK business.
If the values of the £1 goes up so £1 =£1.75
then £1000 will cost $1750, therefore, good
for UK business – bad for them.
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A fall in the value of the £ is good news for
two types of British firm:For exporting firms a fall is good because it
means that more of the good will be sold
abroad as it is now cheaper.
A fall in the value of the £ means that
IMPORTED goods are more expensive so
more goods should be bought by Companies
within the UK
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A fall in the value of the £ can also be bad
news for some businesses!
REMEMBER a FALL in the value of the £ raises
the price of imports to the UK, so firms that
have to import goods will have to pay more
for them. If these costs can not be passes on
then the profits of the business will fall.
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A rise in the value of the £ has the opposite
effect to a fall in its value.
It is bad news for firms that EXPORT, the price
of their good will rise for foreign companies
so they will sell less.
It is bad for UK businesses that compete
against foreign imports as the price of these
imports will be less, so the consumers will
buy the imported goods if they are cheaper...
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It is good news though for UK firms that have
to use imported goods as the price of the
imports will fall. The business can choose to
pass on the saving to its own customers or
use it to gain more profits!
What would you do?