Question

How can changes in foreign exchange rates affect the profitability of financial institutions?

Short answer

The change in value of currency affects the financial assets of the financial institutions.

Step-by-step solution

Step 1. Introduction

Institutions that focus on providing financial services to consumers such as investments, loans, deposits, mutual funds, pension funds, etc. Different types of financial institutions are commercial banks, investment banks, insurance institutions.

Step 2. Explanation

Changes in foreign exchange rates have an impact on the earnings produced by foreign exchange traders who work for financial institutions, as well as the value of financial institutions' assets.

The value of assets held by financial institutions can change because of changes in foreign exchange rates.