Share
Explore BrainMass

Exchange Rate Risk

Please explain in simple terms as this is for my own understanding.

I am trying to understand exchange rate risk. Following is a yen to US dollar conversion table.

Jan.1993 124.73
Feb. 118.25
Mar. 114.88
Apr. 111.05
May 107.08
June 106.50

In this scenario, is the dollar depreciating against the yen?
In this scenario, I have noticed that as the dollar depreciates against the yen, the conversion to dollars yields more US dollars. Is that correct?
In the same scenario, I have noticed that as the dollar appreciates against the yen, the conversion to dollars yields fewer US dollars. Is that correct?
Please explain what is meant when they say the yen is overvalued. Please provide examples of what happens in this case when yen is converted to dollars.

Thank you.

Solution Preview

In this scenario, is the dollar depreciating against the yen?

Yes, both of your observations are correct. If dollar depreciates, the conversion from yen to dollars yields more dollars (that is you can buy more dollars with a fixed amount of yen). If dollar ...

Solution Summary

An exchange rate risk for simple terms are examined.

$2.19