Currency and Foreign Exchanges
This section discusses currency exchange, exchange rates, and how currency exchange rates are determined based on the direct and indirect currency quotes (also known as the US and European terms, respectively). It also discusses spot rates, forward rates,
and cross rates. Why might companies use these tools?
What Is the Purpose of the Foreign Exchange Market?
Currency Speculation
Speculation refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit. Such changes could happen instantly or over a period of time.
High-risk, speculative investments by nonfinance companies are less common these days than the current news would indicate. While companies can engage in all four uses discussed in this section, many companies have determined over the years that arbitrage and speculation are too risky and not in alignment with their core strategies. In essence, these companies have determined that a loss due to high-risk or speculative investments would be embarrassing and inappropriate for their companies.