Reasons for buying and selling foreign currencies: payment of profit, interest and dividends between countries

Why Do We Buy and Sell Foreign Currencies? 🤔

Think of foreign currencies like different flavours of ice‑cream at a global market. When you want a scoop of vanilla from France, you need the French currency (euros). In international trade, businesses and investors need foreign money for:

• Payment of profit – selling goods abroad and receiving money in the seller’s currency.
• Interest – earning money from foreign bonds or loans.
• Dividends – profits paid by foreign companies to shareholders.
• Importing goods – paying suppliers in their currency.
• Travel and tourism – buying local currency for expenses.

Payment of Profit 💸

Imagine ABC Electronics sells a smartphone to a customer in Japan for 10,000 Japanese yen (¥). ABC receives ¥10,000, but its home currency is the British pound (£). To use the money, ABC must sell yen for pounds at the current exchange rate.

Example calculation:

If 1 £ = 150 ¥, then 10,000 ¥ ÷ 150 ¥/£ = 66.67 £.

Thus, ABC turns foreign earnings into its own currency to pay salaries, invest, or distribute profits.

Interest Payments from Foreign Investments 📈

Suppose a UK investor buys a German government bond that pays 5 % interest in euros (€). Each year, the investor receives €500 interest. To use this money in the UK, the investor must sell euros for pounds.

Illustration:

If 1 £ = 1.10 €, then €500 ÷ 1.10 € / £ = 454.55 £.

Thus, foreign interest income is converted to the investor’s home currency.

Dividends from Foreign Companies 💰

When a UK shareholder owns shares in a Japanese company, the company may pay dividends in yen. The shareholder then needs to sell yen for pounds to receive the dividend in a usable form.

Analogy: It’s like receiving a gift in a language you don’t understand—you need to translate it (convert the currency) to enjoy it.

How Exchange Rates Are Determined 🌍

Exchange rates are set by the supply and demand for each currency in the foreign exchange market. Factors include:

1. Interest rate differentials – higher rates attract foreign capital.
2. Economic growth – strong economies boost demand for their currency.
3. Political stability – uncertainty can reduce demand.
4. Trade balances – a country that exports more than it imports often sees its currency strengthen.

When a country’s currency is in high demand, its value rises; when demand falls, its value falls.

Sample Exchange Rate Table 📊

Exam Tips for IGCSE Economics 0455 📚

• Understand the flow of money: Know how profits, interest, and dividends move across borders.
• Use real‑world examples: Relate to companies you know or recent news about trade.
• Show calculations: Demonstrate how to convert currencies using given rates.
• Explain exchange rate factors: Be ready to discuss interest rates, trade balances, and political events.
• Practice with tables: Convert amounts in sample tables and explain the impact on businesses.
• Remember: “Buy” means you receive the foreign currency; “sell” means you give it away for your own.”