Question

Explain how automakers interact with the foreign exchange market.

Answer 1

The foreign exchange market is the market from which one can exchange the currency of one country for the currencies of other countries. Any company which is involved in international business need to interact with the foreign exchange market. Automakers often import parts from various foreign countries. These foreign exporters need to pay in their respective home currencies. Therefore, the automaker needs to buy foreign currencies from the foreign exchange market to pay these exporters. Also, when the automaker receives payment in foreign currencies for its exports of finished goods, it interacts with the foreign exchange market to exchange the foreign currencies for the domestic currency.