Exchange Rates, Competitiveness, and Financial Ratios
Classified in Economy
Written at on 
English with a size of 2.51 KB.
Competitiveness and Trade
Nominal Exchange Rates
When our currency's value increases, our competitiveness decreases, and importations increase in relative terms.
Price Levels
- Our Country: If prices in our country increase, our exports decrease, and imports increase.
- Foreign Country: If prices in foreign countries increase, our competitiveness increases, benefiting our exports, and our imports decrease.
Foreign Exchange Market
- Price Determination: The exchange rate between countries is established based on supply and demand.
- Hedging: Protection against currency fluctuations, safeguarding investors and businesses from losses due to currency appreciation or depreciation.
- International Finance: Countries can lend and borrow money by converting currencies.
Example: Spain/Switzerland
If the real exchange rate increases, our currency is strong, and our competitiveness decreases.
European Central Bank (ECB)
- Contractive Monetary Policy: Increasing interest rates to control inflation in Spain would decrease spending and stabilize prices.
- Exchange Rate Intervention: The ECB can intervene in the foreign exchange market by buying foreign currency and selling domestic currency to decrease the exchange rate and enhance export competitiveness.
Key Financial Ratios
Liquidity Ratios
- Liquidity Ratio: Current Assets / Current Liabilities > 1
- Acid Test: (Debtors + Treasury) / Current Liabilities
- Cash Ratio: (Cash and Equivalents) / Current Liabilities
Leverage and Solvency Ratios
- Leverage: Liabilities / (Equity + Liabilities) > 0.5
- Net Financial Debt (NFD) / EBITDA: (Liabilities - Cash) / EBITDA < 3 (Indicates indebtedness relative to EBITDA, not assets)
- Solvency Ratio: Assets / Liabilities > 1
- Financial Autonomy Ratio: Equity / Liabilities > 1
Profitability Ratios
- Return on Equity (ROE): Net Profit / Equity (Reflects the net profit for shareholders)
- Return on Assets (ROA): Operating Result / Assets (Indicates how many euros are generated for each euro of assets)