Exchange Rates and Currencies in International

Business

• Currency – is a form of money and a unit of exchange.

Example: U.S. Dollar (USD), European Euro (EUR), Japanese Yen
(JPY), Philippine peso (PHP).
– Each country using its own unique currency, which
complicates international business transactions.
 Dollarization (Currency Substitution)

• Is the process of adoption of foreign country’s currency as legal tender

for monetary transaction.
• Example: Countries such as Panama, East Timor, Ecuador adopted the
U.S dollar as their official national currency.
 Exchange Rate

• are the amount of one currency you can exchange for another.
• Example: 1 Philippine Peso = 0.019 US Dollar
1 USD = 52.02 PHP
 Effects of Exchange Rate Changes: Currency
Appreciation & Depreciation
• Two types of changes in exchange rate:
1. Appreciate (go up in value) – increased in value relative to another
country.
Example: Before Appreciation of Peso Value: 1 USD = 52.02 PHP
After Appreciation of Peso Value: 1 USD = 40 PHP
Effect: Import goods are cheaper but Export goods are less profitable.
Disadvantage: Leads to Trade Deficit
 2. Depreciation (go down in value)
• Fell in value relative to another currency.
Example: Before Depreciation of Peso Value: 1 USD = 52.02 PHP
After Depreciation of Peso Value: 1 USD = 55.00 PHP

Effect: Import goods are expensive but exports goods will be profitable.

Advantages: Prevent Trade Deficit, Boost Exports, Reduce Government Debt.

 Currency Risk
• Potential harm that arises from changes in the price of one currency relative to
another.
• Also known as Financial Risk
• For example, imagine a company based in the Eurozone that purchases $1 million
worth of supplies from a provider in the United States. It needs to exchange euros
into US dollars in order to complete the deal. When the company signed this deal with
his provider, the exchange rate was USD/EUR 0.80, that is, 80 euro cents were needed
to purchase 1 US dollar. Since payment is due 60 calendar days after the signature of
the contract, the exchange rate moves against the company to USD/EUR 0.85. These
extra 5 euro cents per US dollar mean that the company now has to pay €850,000,
instead of the €800,000 they would have paid when they signed the contract.
 Convertible and Nonconvertible Currencies

• Convertible currency – can be easily exchanged for other currencies.

Hard currencies- easily convertible currency. These includes; dollar,
yen, pound and euro.
Nonconvertible currency – when it is not acceptable for international
transactions.
Soft currencies – there is restriction on convertibility, such as Chinese
yuan, Venezuelan bolivar, Uzbekistan sum, Vietnamese Dong.
 Capital Flight
• The rapid sell off by residents or foreigners of their holdings in a nation's
currency or other assets, usually in response to a domestic crisis that causes
investors to lose confidence in the country's economy.
 Foreign Exchange
• Foreign exchange represents all forms of money that are traded
internationally, including foreign currencies, bank deposits, checks, and
electronic transfers.
 Foreign Exchange Market
• The global marketplace for buying and selling national currencies.