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The financial context of business II: International aspects

Exchange rate systems

3.1 Exchange rates

 The exchange rate of a currency is a price – e.g. GBP1 = USD1.50

3.2 Exchange rate systems – floating exchange rates

 Based on supply and demand for the currency (e.g. £)

Increases demand for £ Increases supply of £

i.e. want to convert $, ¥, €, etc into £ i.e. want to convert £ into $, ¥, €, etc

 UK exports.  UK imports

 Non-UK tourists holidaying in the  UK residents taking overseas
UK holidays

 Non-UK firms investing in the UK  Overseas investment by UK
residents and firms
 Speculation
 Speculation
 [Government intervention]
 [Government intervention]

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