Unit 26
What is the base interest rate? What is the variable interest rate? What is the exchange rate to Euros? What is the exchange rate to US dollars? What does this mean for businesses?
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
What is the exchange rate today? How many currencies are you shown?
To calculate the cost of a foreign exchange you need to know the exchange rate, it is a calculation of 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 (1000x1.20) 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).
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
If the exchange rate to US Dollard is £1 = $1.50 then £1000 of orders will cost the $1500, but if the exchange rate of the £ drops to £1 = $1, then £1000 of orders will cost $ 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.
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
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.
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...
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?
Snakes and ladders! Use good things and bad things about The Impact of Exchange Rates to make the game.
Start
Complete the pages in the workbook on: Supply and Demand Interest rates, Exchange rates, Homework sheet – due Monday 13th