Foreign exchange market
by business & economics research advisor, from the library of congress

in 1971, u. s. dollars were no longer exchanged for gold; and in 1973, the floating exchange rate system that governs the fx market today was put into place. now, all currencies are valued by the market forces of supply and demand. since the abandonment of the gold standard, the fx market has become an important part of international economics. with the advent of floating exchange rates, the foreign exchange market has become unregulated. no institution sets rules for trading, and it is not under the supervision of any international organization. when necessary, governments and central banks often work together to restore stability to the fx market. foreign exchange and international trade are closely connected. together, they affect the economic situation of people throughout the world.
currently, how are foreign exchange rates established?
(a)

In each of the cases below, assume division x has a product that can be sold either to outside customers or to division y of the same company for use in its production process. the managers of the divisions are evaluated based on their divisional profits. case a b division x: capacity in units 200,000 200,000 number of units being sold to outside customers 200,000 160,000 selling price per unit to outside customers $ 90 $ 75 variable costs per unit $ 70 $ 60 fixed costs per unit (based on capacity) $ 13 $ 8 division y: number of units needed for production 40,000 40,000 purchase price per unit now being paid to an outside supplier $ 86 $ 74 required: 1. refer to the data in case a above. assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. a. what is the lowest acceptable transfer price from the perspective of the selling division? b. what is the highest acceptable transfer price from the perspective of the buying division? c. what is the range of acceptable transfer prices (if any) between the two divisions? if the managers are free to negotiate and make decisions on their own, will a transfer probably take place?