Section A: Key terms and recall
Define the term 'foreign exchange rate'. [2 marks]
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The price of one currency in terms of another currency. [1 mark] For example, if 1 British Pound (GBP) = 1.20 US Dollars (USD), the foreign exchange rate is 1.20. [1 mark]
List two reasons why a business might need to buy foreign currency. [2 marks]
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To pay for imported goods or services. [1 mark] To invest in foreign assets or businesses. [1 mark]
Explain what is meant by the term 'foreign exchange market'. [2 marks]
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A global marketplace where currencies are traded. [1 mark] It enables the conversion of one currency into another. [1 mark]
State two factors that can influence the demand for a currency. [2 marks]
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The level of imports and exports. [1 mark] Investor confidence in the country's economy. [1 mark]
Give one example of a consequence of a change in foreign exchange rates. [1 mark]
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A change in the price of imported or exported goods. [1 mark]
Section B: Applying your knowledge
A British tourist is planning a trip to Japan. The current exchange rate is 1 GBP = 150 Japanese Yen (JPY). The tourist has 500 GBP to spend. Calculate how many Japanese Yen the tourist will receive. [2 marks]
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500 GBP * 150 JPY/GBP = 75,000 JPY. [2 marks]
A US company wants to import goods from Germany. The current exchange rate is 1 USD = 0.85 Euro (EUR). The goods cost 10,000 EUR. Calculate the cost in US Dollars. [2 marks]
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10,000 EUR / 0.85 USD/EUR = 11,764.71 USD. [2 marks]
Explain how the following events might affect the exchange rate of a country's currency:
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a) An increase in interest rates can make the country's assets more attractive to foreign investors, increasing the demand for the currency and causing its value to rise. [2 marks] b) A decrease in exports can reduce the demand for the country's currency, as fewer foreign currencies are needed to pay for the goods, causing the value of the currency to fall. [2 marks]
A country's currency has appreciated (increased in value) against other currencies. Explain one possible consequence of this for the country's economy. [2 marks]
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An appreciation of the currency can make imported goods cheaper, benefiting consumers. [1 mark] However, it can also make the country's exports more expensive, potentially reducing demand for them. [1 mark]
Section C: Explain and analyse
Analyse the factors that might cause a currency to depreciate (decrease in value). [4 marks]
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A decrease in demand for the country's exports, reducing the need for foreign currencies to be converted into the domestic currency. [1 mark] A decrease in foreign investment, reducing the demand for the domestic currency. [1 mark] A decrease in the country's interest rates, making the country's assets less attractive to foreign investors. [1 mark] Speculation in the foreign exchange market that the currency will fall in value, leading to a decrease in demand for the currency. [1 mark]
Evaluate the consequences of a sudden and large depreciation of a country's currency. [6 marks]
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A sudden and large depreciation of a country's currency can have several consequences, both positive and negative: Positive consequences: It can make the country's exports cheaper, potentially increasing demand for them and boosting the economy. [1 mark] It can make imported goods more expensive, encouraging domestic production and potentially creating jobs. [1 mark] Negative consequences: It can make imported goods, such as food and fuel, more expensive, potentially leading to inflation. [1 mark] It can make it more expensive for the country to repay foreign currency-denominated debts. [1 mark] It can lead to a loss of confidence in the country's economy, potentially leading to further depreciation. [1 mark] It can make foreign travel more expensive for residents. [1 mark]
Section D: Challenge
Research and write a short report (around 200 words) on the impact of changes in foreign exchange rates on a specific industry or sector of your choice. [6 marks]
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Model answer will vary, but should include: An introduction to the chosen industry or sector. [1 mark] An explanation of how changes in foreign exchange rates can affect the industry or sector. [2 marks] Examples of how the industry or sector has been affected by changes in foreign exchange rates in the past. [2 marks] A conclusion summarising the main points. [1 mark]