Which is better: a higher or lower exchange rate between 2 currencies (e.g. 1$ to 40₱ or 1$ to 50₱), and why?
Nice question. It depends on who is asking and what is the financial target.
A. If you ask in person:
If you want $ and you have P, the rate of $/P is smaller and makes you happier because you can exchange more $ with your P.
If you want P and you have $, the rate of $/P is smaller and makes you unhappier because you can’t exchange more $ with your P.
B. If you are a business owner:
If you are a company director, and you want to sell your product to the USA, in case you can sell immediately, you will then invest your P to hire local human resources, buy equipment, electrics, etc., and then, when you get the product, you sell to get back $. So, you can revert back to the personal version to know what you want.
But if your products are not ready yet and after you sign a contract with the USA to have your product delivered in the next year, for example, then you will pray that in 1 year the rate will stay the same, or else you are exposed to the risk of losing money / or gaining one from the contract that you have signed in P. For example, when you sign a contract of 100$ the rate is 1/45. Now you invest like 3000P to make your product locally. So, in the end year, when you finish delivering your product to the USA, they send you 100$, you convert the 100$ back to P. Here 3 chances happen:
- If the rate remains the same 1/45: You will then have 4,500P, so your profit is 4,500P – 3,000P cost = 1500P
- If the rate goes down to 1/40; you will now have 4,000P and profit is 1,000P.
If the rate goes up to 1/50, you will have 2,000P profit.
Regards,
Will Vu - Forex Investors since 2006
If you see my post interesting, please let me know. Thanks!