CHAPTER 1

Foreign Exchange Rates

Global growth is essential to many large companies. Managers need to understand the impact of foreign exchange (FX) rates on corporate results and strategic decisions. This chapter introduces some basic “mechanics” of FX rates. The subsequent chapters cover what economic factors drive FX rates.

Foreign Exchange Rates

An FX rate is, simply, the price of one currency in terms of another. An FX rate between U.S. dollars and British pounds can be expressed as either (a) U.S. dollars per British pound or (b) British pounds per U.S. dollar. We use the notation 2 $/£ to mean 2 U.S. dollars ($2) per British pound, or that $2 will buy 1 British pound. Equivalently, we can use the reciprocal, and say that the FX rate is ...

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