Note on Understanding Exchange Rates

by: Robert E. Kennedy

Publication Date: March 31, 2008
Length: 8 pages
Product ID#: 1-428-646

Core Disciplines: Economics, International Business, Strategy & Management

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Teaching Note

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In today’s global economy, exchange rates have a significant influence on a firm’s competitive position. It is critical, therefore, that business managers understand exchange rates so that they can make informed decisions and manage risks in order to better compete in the marketplace. Exchange rates, however, can be misunderstood. Indeed, managers often don’t know what they are, how to calculate them, or how they impact the firm. This note provides definitional information and a basic analytical tool set with which to understand exchange rates and their effect on business performance.

Teaching Objectives

After reading and discussing the material, students should:

  • Describe how exchange rates are quoted.
  • Explain the difference between "nominal" and "real" exchange rates.
  • Recognize the differences between currency appreciation and depreciation.