What this lesson teaches
I can define a foreign exchange rate.
Syllabus K343, 6.3.1. Definition of foreign exchange rate
I can explain why people and governments buy and sell foreign currencies.
Syllabus K343, 6.3.2. Reasons for buying and selling foreign currencies: trade in goods and services; speculation; government intervention in currency markets; payment of profit, interest and dividends between countries; workers' remittances; investment in capital goods between countries
Make a guess
You never travel abroad. Do exchange rates affect you?
- No. Exchange rates matter to travellers and traders, not to you.
- Yes, through the prices of imported goods you buy.
- No, because shops set prices in Singapore dollars.
Show the answer
Yes, through the prices of imported goods you buy.
Food, fuel and phones are often imported. When the exchange rate moves, their prices in Singapore change too.
An exchange rate is the price of one currency in terms of another; currencies are bought and sold for trade, investment and speculation.
A foreign exchange rate is the price of one currency in terms of another. For example, S$1 = US$0.75 means one Singapore dollar buys 75 US cents.
Currencies are bought and sold in the foreign exchange market. People and firms need foreign currency for trade in goods and services: a Singapore firm importing American machines must pay in US dollars.
Other reasons include investment in capital goods abroad, such as building a factory in another country. Firms pay profit, interest and dividends to foreign owners. Migrant workers send remittances home to their families.
Speculators buy a currency hoping its value will rise, so they can sell later for a profit. Governments and central banks also buy and sell currencies to influence the exchange rate.
- Exchange rate
- Price of one currency in terms of another.
- Reasons to trade currencies
- Trade, investment, profit/interest/dividends, remittances, speculation, government intervention.
Worked example: Who needs which currency?
Decide who sells S$ and who buys S$ in each case.
- A Singapore importer buying Japanese cameras: sells S$ to buy yen.
- An American tourist visiting Singapore: buys S$ with US dollars.
- A foreign worker in Singapore sending money home: sells S$ for their home currency.
- A foreign firm building a factory in Singapore: buys S$.
Watch out for this
An exchange rate only matters to people who travel abroad.
Exchange rates affect the price of all imports and exports, so they affect firms, workers and consumers who never travel.
Check your understanding
A Singapore company buys oil priced in US dollars. What must it do?
- Buy Singapore dollars with US dollars
- Sell Singapore dollars to buy US dollars
- Nothing; exchange rates do not affect imports
Show the answer
Sell Singapore dollars to buy US dollars
Right. It needs US dollars to pay for the oil.
Check your understanding
The exchange rate is S$1 = US$0.75. A jacket costs US$150 in New York. What is its price in Singapore dollars?
- S$112.50
- S$150
- S$150.75
- S$200
Show the answer
S$200
Right. Each Singapore dollar buys US$0.75, so US$150 / 0.75 = S$200.
Check your understanding
The exchange rate is S$1 = RM3.40. A Singapore tourist changes S$500 into ringgit. How many ringgit does she receive?
- RM147.06
- RM500
- RM1,700
- RM503.40
Show the answer
RM1,700
Right. Each Singapore dollar buys RM3.40, so S$500 x 3.40 = RM1,700.