- Globalization has led to increased international trade and investment as well as the rise of multi-national corporations operating facilities in multiple countries. - When transacting internationally, currencies must be exchanged and exchange rates fluctuate daily based on supply and demand in global currency markets. Exchange rate movements can impact the profitability of international businesses. - Governments sometimes intervene in currency markets to influence exchange rates but ability to influence rates is limited by foreign exchange reserves. The international monetary system has evolved from fixed to floating exchange rates.

1. International Finance Chapter 18

9. Changing Exchange Rates and Exchange Rate Risk—Example Q: An American company orders 500 sweaters on 9/07/02 from a British company at a cost of 35,000 pounds with terms of n/60. The exchange rate at that time was $1.6521 U.S. per pound. Calculate the gain or loss on the transaction if the bill was not paid until 11/7/02, when the exchange rate was $1.95 U.S. per pound. A: If the bill had been paid on 9/07/02 at the then current exchange rate, the cost would have been $57,823.5, or 35,000 pounds  1.6521. However, if the bill was not paid until 11/7/02 at the then current exchange rate, the price would have been $68,250, or 35,000 pounds  1.95. Thus, an $10,426.5 loss would have resulted due to the large shift in exchange rates over the two months. Example