Global expansion and uncertainty: exchange rates

Reading and converting exchange rates

If GBP 1 = USD 1.25, then:

• to convert pounds to dollars, multiply by 1.25 (GBP 200 = USD 250);
• to convert dollars to pounds, divide by 1.25 (USD 500 = GBP 400).

A currency appreciates (strengthens) when it buys more of another currency, and depreciates (weakens) when it buys less.

SPICED: Strong Pound, Imports Cheap, Exports Dear

When a firm's home currency appreciates:

• its exports become more expensive in foreign currency (or it must accept a lower margin to hold the foreign price);
• imported raw materials and components become cheaper;
• profits earned abroad are worth less when converted home.

When the home currency depreciates, the reverse: exports cheaper abroad, imports dearer, overseas profits worth more.

The overall impact depends on price elasticity of demand for exports, how much of the firm's costs are imported, whether it competes on price or quality, whether it hedges (fixes a future rate with a bank) and how long the change lasts.

Worked numbers: a stronger home currency

A UK firm sells a product at GBP 40. At GBP 1 = USD 1.25, US customers pay USD 50.00. If the pound rises to USD 1.4, the US price becomes USD 56.00, a rise of 12%. If the firm keeps the US price at USD 50.00, it receives only GBP 35.71 per unit.

Effects of the pound appreciating

Managing exchange rate risk and exam use

Ways to reduce risk: hedging with forward contracts; invoicing in the home currency (passing the risk to customers); producing in the countries where it sells (natural hedging); buying inputs in the same currency as sales.

The October 2024 series paper asked candidates to assess the importance of exchange rates for a global business based in Turkey (12 marks). Level 4 answers used data from the extract, built chains of reasoning on prices, costs and profit, and weighed exchange rates against other factors before reaching a supported judgement.

Worked example

A Turkish exporter sells machinery at TRY 2,000,000. The rate moves from EUR 1 = TRY 40 to EUR 1 = TRY 50. Find the euro price before and after, and the percentage change.

1. Before: 2,000,000 / 40 = EUR 50,000
2. After: 2,000,000 / 50 = EUR 40,000
3. Change: (40,000 - 50,000) / 50,000 x 100 = -20%

Answer: The lira depreciated, so the euro price fell 20% to EUR 40,000, making the exporter more price competitive.

Check yourself

1. The exchange rate is USD 1 = INR 85. How many rupees is USD 240?
   Show answer

   20400 INR. 240 x 85 = INR 20,400.

2. The exchange rate is EUR 1 = USD 1.10. A US customer pays USD 2,750. How many euros is that?
   Show answer

   2500.00 EUR. 2,750 / 1.10 = EUR 2,500.00.

3. A Japanese firm sells a camera for JPY 120,000. The rate moves from USD 1 = JPY 150 to USD 1 = JPY 160. Calculate the new US dollar price.
   Show answer

   USD 750.00. 120,000 / 160 = USD 750.00.

4. Same camera: calculate the percentage change in the US dollar price (use a minus sign for a fall).
   Show answer

   -6.25 %. Old price USD 800, new USD 750: (750 - 800) / 800 x 100 = -6.25%.

5. A UK café imports coffee beans priced at USD 18,000. How much more do they cost in pounds if the pound falls from USD 1.30 to USD 1.20? Give your answer to the nearest penny.
   Show answer

   GBP 1153.85. 18,000 / 1.20 = 15,000; 18,000 / 1.30 = 13,846.15; difference GBP 1,153.85.

6. A business's home currency appreciates. Which is most likely?
   • Its exports become cheaper in foreign currency
   • Its overseas profits are worth more in home currency
   • Its imported components become cheaper
   • Foreign tourists find it cheaper to visit
   Show answer

   Its imported components become cheaper. A stronger currency buys more foreign currency, so imports cost less.

7. Explain why a depreciation of its home currency may not increase an exporter's profit.
   Show answer

   If the firm imports many of its raw materials or components, their cost rises, and if demand for its exports is price inelastic, the lower foreign price may not increase sales much, so profit may not rise.. The net effect depends on imported costs and price elasticity of demand.

8. Explain how hedging reduces exchange rate risk.
   Show answer

   The business agrees a fixed exchange rate now with a bank for a future transaction (a forward contract), so it knows exactly how much it will pay or receive whatever happens to the rate.. Hedging swaps an uncertain future rate for a known one, usually for a fee.

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Sources

• Pearson Edexcel International Advanced Level in Business specification (first teaching 2018)
• Pearson Edexcel IAL Business WBS14/01 mark scheme, October 2024 series (published January 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.