BUS613: Advanced International Business

LEARNING OBJECTIVES

• Explain the foreign exchange market and the main groups of people or firms who participate in the market
• Describe different types of investments like foreign direct investment (FDI), portfolio investment, and hedging

Most countries have their own currencies, but not all. Sometimes small economies use the currency of an economically larger neighbor. For example, Ecuador, El Salvador, and Panama have decided to dollarize - that is, to use the U.S. dollar as their currency. Sometimes nations share a common currency. The best example of a common currency is the Euro, a common currency used by 19 members of the European Union. With these exceptions duly noted, most international transactions require participants to convert from one currency to another when selling, buying, hiring, borrowing, traveling, or investing across national borders. The market in which people or firms use one currency to purchase another currency is called the foreign exchange market.

TRY IT

Which of the following would be participating in the foreign exchange market?

1. An American manufacturer buys Euros to purchase parts from a German supplier.
2. Honda, a Japanese car manufacturer, opens a new plant in the US.
3. Bill has lost trust in the currency of his country and purchases gold.

Every exchange rate is a price - the price of one currency expressed in terms of units of another currency. The key framework for analyzing prices, whether in this course, any other economics course, in public policy, or business examples, is supply and demand in markets.

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Source: Lumen Learning, https://courses.lumenlearning.com/wm-macroeconomics/chapter/the-foreign-exchange-market/
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