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 INTRODUCTION
*An international exchange rate,
also known as a foreign
exchange (FX) rate, is the
price of one country's
currency in terms of another
country's currency. Foreign
exchange rates are relative
and are expressed as the value
of one currency compared to
another.
INTRODUCTION

*When selling products internationally, the exchange rate for the two
trading countries' currencies is an important factor. Foreign
exchange rates, in fact, are one of the most important determinants
of a countries relative level of economic health, ranking just after
interest rates and inflation.
 IMPORTANCE OF FOREIGN EXCHANGE IN
INTERNATIONAL TRADE

*It is important because the exchange rate, the price of one

currency in terms of another, helps to determine a nation’s
economic health and hence the well-being of all the people
residing in it.

*The exchange rate is also important because it can help or hurt

specific interests within a country.
 FACTORS THAT INFLUENCE EXCHANGE RATES

1. Inflation- Countries with

lower inflation rates tend to see
an appreciation in the value of
their currency.

2. Interest Rates- Higher

interest rates cause an
appreciation. Cutting interest
rates tends to cause a
depreciation
 FACTORS THAT INFLUENCE EXCHANGE RATES

3. Speculation- If speculators believe the peso will rise in the

future, they will demand more now to be able to make a profit.
This increase in demand will cause the value to rise.

4. Change in Competitiveness- If a specific goods become

more attractive and competitive this will also cause the value of
the exchange rate to rise. This is a similar factor to low
inflation.
 FACTORS THAT INFLUENCE EXCHANGE RATES

5. Economic Growth/Recession- A recession may cause a

depreciation in the exchange rate because during a recession
interest rates usually fall. However, there is no hard and fast
rule. It depends on several factors.
 THREE (3) MAJOR TYPES OF EXCHANGE
RATE SYSTEMS

1. Floating exchange rate or Fluctuating exchange rate: A system where the

value of currency in relation to others is allowed to freely fluctuate subject to
market forces.

2. Fixed exchange rate (also known as pegged exchange rate system): A system
where a currency’s value is tied to the value of another single currency, to a
basket of other currencies, or to another measure of value, such as gold.

3. Pegged floating exchange rate: A currency system that fixes an exchange rate
around a certain value, but still allows fluctuations, usually within certain values,
to occur.
 TWO (2) MOST COMMON MEANS OF DESCRIBING
EXCHANGE RATES

1. REAL EXCHANGE RATE- The purchasing power of a

currency relative to another at current exchange rates and
prices.

2. NOMINAL EXCHANGE RATE- The amount of

currency you can receive in exchange for another
currency.
 FOREIGN EXCHANGE MARKET

*The Foreign exchange markets also termed as, Forex markets, consists of
investment management firms, central banks, commercial companies,
retail forex brokers, and investors.

*The foreign exchange market is a global online network where traders

and investors buy and sell currencies.

*Foreign exchange market also undertakes currency conversion for

investments and international trade.
 KINDS OF FOREIGN EXCHANGE MARKET

SPOT MARKETS

These are the quickest transactions involving currency in the foreign

exchange market. This market provides immediate payment to the buyers
and sellers as per the current exchange rate.
 KINDS OF FOREIGN EXCHANGE MARKET

FORWARD MARKETS
In forward contract, two parties (two companies,
individual or government nodal agencies) agree to do a trade
at some future date, at a stated price and quantity. No security
deposit is required as no money changes hands when the deal
is signed.
 KINDS OF FOREIGN EXCHANGE MARKET

SWAPS MARKETS

A swap is a contract in which two parties exchange their

future cash flows for a period of time. The most common type
of swap is an interest rate swap. In this, parties agree to
exchange interest rate payments.
 IMPORTANT FUNCTIONS OF
A FOREIGN EXCHANGE MARKET

1. TRANSFER FUNCTION- to transfer finance, purchasing

power from one nation to another. Such transfer is affected
through foreign bills or remittances made through
telegraphic transfer.
2. CREDIT FUNCTION- to provide credit for international
trade.
3. HEDGING FUNCTION- to make provision for hedging
facilities, i.e., to facilitate buying and selling spot or
forward foreign exchange.
 TWO (2) TYPES OF POTENTIAL USERS OF FOREIGN
CURRENCY FUTURE

 HEDGER:
The hedger seeks to reduce and manage the risk of financial
losses that can arise from transacting business in
currencies other than one's native currency.
 SPECULATOR:
Speculators provide risk capital and assume the risk the
hedger is seeking to transfer in the hope of making a profit
by correctly forecasting future price movement.
 GROUP III

Prepared By:
Aguba, Rica A.
Dimaano, Erwin E.
Landicho, Danvir

Submitted to:
Mr. John Jeffry Mendoza
BSBA-3
International Business and Trade
(9:00-10:30/TTH)