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Chapter 9.docx

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University of British Columbia
PSYC 100

Chapter 9Foreign exchange market is a market for converting the currency of one country into that of another country Exchange rate the rate at which one currency is converted into another ie Kia uses the foreign exchange market to convert the dollars it earns from selling cars in the US into the Korean won The Functions of the Foreign Exchange MarketForeign exchange risk the risk that changes in exchange rates will hurt the profitability of a business deal The unpredictable changes in the exchange ratesCurrency Conversion4 main uses of foreign exchange markets1Payments a company receives for its exports the income it receives from foreign investments the income it receives from licensing agreements with foreign firms maybe in foreign currencies2International businesses use foreign exchange markets when they must pay a foreign company for its products or services in its countrys currency 3International business use foreign exchange markets when they have spare cash that they wish to invest for sot terms in money markets 4Currency speculation is another use of foreign exchange markets Involves the short term movement of funds from one currency to another in the hope of profiting from shifts in exchange ratesThe world and the Canadian dollarSecondary currencyBeing recognized at a petrocurrency a currency linked to the raw materials including oil and natural gas that Canada exports Large Canadians businesses fear when exporting to the US the rise in a CNDwill increase the cost to US consumer and damage export related profits Insuring Against Foreign Exchange RiskA second function of the foreign exchange market is to provide insurance to protect against the possible adverse consequences of unpredictable changes in exchange ratesforeign exchange risks Spot Exchange Rates
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