Question

Foundations of Financial Management: Define and discuss what an exchange rate is and how exchange rates impact international business where firms do business in several currencies worldwide

Answer 1

Exchange rate is the rate at which on con buy foreign currency.For example 1$ = 70 Rs. This is exchange rate beween US $ and Indian Rs. It implies that one can buy US $ buy paying 70 Indian Rs or one can sell 1 US $ and can get 70Rs
This exchange rate is effected by multiple factors such as goverment policies etc. For example if in India a stong goverment is formed that value of rs will increase and the above exchange rate i.e. 1$ = 70 Rs can change to 1$ = 65 Rs. implying that Rs has appreciated against dollar, Similarly if weak goverment is formed than this exchange rate can become 1$ =75 Rs.
Thus a company operating in many country always faces risk of getting it's currency depreciated against foreign currency. To protect from this risk company can use hedging techniques like buying or selling future contracts etc