Exchange Rates

Definition: 

The rate at which two currencies can be exchanged through the FOREX (or FX) market, as facilitated by an Investment Bank.  

The exchange rate continually fluctuates (sometimes with great volatility and speed), impacting the costs and revenues of global firms. 

The symbol for the Australian Dollar is the AUD.

Different outcomes as currency appreciates (up) or depreciates (down):

Appreciation: 

• Importers win (buy more goods for the same value of AUD; reducing costs of global inputs). Domestic firms experience greater global competition due to increased affordability - consumers can buy international products more cheaply with the stronger Australian dollar.

• Exporters lose (less revenue in AUD; lift international prices and lose sales). 

Depreciation: 

• Exporters win (more AUD revenue from global sales; growth of firm as the lower currency drives sales); 

• Importers lose (more AUD required for same global input; reducing profitability). Domestic firms experience less global competition due to decreased affordability.

In order to mitigate currency risk, firms can use hedging and derivatives.