One function of the foreign exchange market is to convert the currency of one country into the currency of another. A second function of the foreign exchange market is to provide insurance against foreign exchange risk. The most common approach to exchange rate forecasting is fundamental analysis. This relies on variables such as money supply growth, inflation rates, nominal interest rates, and balance-of-payment positions to predict future changes in exchange rates. Identify a country outside of the U.S. and its currency and initial exchange rate. Answer the following questions:
- How stable is the currency against the U.S. dollar?
- Why is this so?
- How many other countries trade with your chosen host country?
- Are there risks involved in doing business with this country?
- What are the projections for this country’s expansion over the next 10 years?