International Trade and Globalisation – Foreign Exchange Rates
Objective
Understand the reasons why businesses and individuals buy and sell foreign currencies in order to trade goods and services internationally.
Why Do We Need Foreign Currency?
When a country trades with another, the transaction is usually settled in the seller’s currency. Therefore, the buyer must obtain that foreign currency before the trade can be completed.
Key Reasons for Buying Foreign Currency
Importing goods – A UK importer purchases machinery from Germany and must pay in euros.
Importing services – A UK software firm outsources cloud services from the United States and pays in US dollars.
Tourism and travel – A British tourist travelling to Japan needs Japanese yen to pay for hotels, meals and transport.
Foreign investment – A UK investor buys shares in an Australian company, requiring Australian dollars.
Education abroad – A student pays tuition fees to a university in Canada, needing Canadian dollars.
Key Reasons for Selling Foreign Currency
Exporting goods – A UK car manufacturer sells cars to the United States and receives US dollars, which are then sold for pounds.
Exporting services – A UK consulting firm provides advice to a client in India and receives Indian rupees.
Receiving tourism revenue – A hotel in Spain receives euros from British guests and converts them to pounds.
Repayment of foreign loans – A UK company that borrowed in Swiss francs must obtain francs to make repayments, then sells any excess francs.
Dividends and interest from overseas assets – A UK investor receives dividends in Japanese yen, which are sold for pounds.
Summary Table
Transaction Type
Currency Needed (Buy)
Currency Received (Sell)
Typical Example
Import of goods
Foreign currency of supplier
Domestic currency (after conversion)
UK retailer buys electronics from Japan – buys yen.
Export of goods
Domestic currency (to pay suppliers)
Foreign currency of buyer
UK car maker sells to USA – receives dollars, sells them.
Import of services
Foreign currency of service provider
Domestic currency
UK firm outsources IT support to India – buys rupees.
Export of services
Domestic currency
Foreign currency of client
UK consultancy advises a French firm – receives euros.
Tourism (outbound)
Foreign currency of destination
Domestic currency
British holiday in Thailand – buys baht.
Tourism (inbound)
Domestic currency (to pay local costs)
Foreign currency of visitors
Spanish hotel receives euros from British guests – sells euros.
How the Process Works
The foreign exchange market (Forex) provides a platform where currencies are bought and sold. The exchange rate determines how much of one currency can be obtained for a unit of another currency.
For a simple transaction:
A UK importer needs €10,000 to pay a German supplier.
The importer contacts a bank or Forex dealer and buys €10,000 at the current exchange rate, e.g., $1 = €0.85.
The bank converts the required amount of pounds (£) into euros and transfers the €10,000 to the supplier.
When the UK exporter receives \$5,000 from a US buyer, the exporter sells the \$5,000 for pounds at the prevailing rate.
Mathematical Example
If the exchange rate is $1 = €0.85, the amount of pounds needed to buy €10,000 can be calculated as:
\$\$
\text{Pounds needed} = \frac{€10,000}{0.85} \times \text{£1 per $1}
Suggested diagram: Flow of foreign currency in an import‑export transaction, showing the buyer converting domestic currency to foreign currency, the payment to the seller, and the reverse conversion when the seller receives payment.