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    Foreign Exchange Rate: Atul Kumar Rai

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    harshu vaidya
    The document discusses foreign exchange rates, defining foreign exchange as other currencies besides a country's domestic currency. It explains the different types of foreign exchange rate systems - fixed, flexible, and managed floating - and how exchange rates are determined by the interaction of supply and demand in foreign exchange markets. Factors that influence demand and supply of foreign exchange are also outlined.

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    Foreign Exchange Rate: Atul Kumar Rai

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    harshu vaidya
    25 views11 pages
    The document discusses foreign exchange rates, defining foreign exchange as other currencies besides a country's domestic currency. It explains the different types of foreign exchange rate systems - fixed, flexible, and managed floating - and how exchange rates are determined by the interaction of supply and demand in foreign exchange markets. Factors that influence demand and supply of foreign exchange are also outlined.

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    The document discusses foreign exchange rates, defining foreign exchange as other currencies besides a country's domestic currency. It explains the different types of foreign exchange rate systems - fixed, flexible, and managed floating - and how exchange rates are determined by the interaction of supply and demand in foreign exchange markets. Factors that influence demand and supply of foreign exchange are also outlined.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    25 views11 pages

    Foreign Exchange Rate: Atul Kumar Rai

    Uploaded by

    harshu vaidya
    The document discusses foreign exchange rates, defining foreign exchange as other currencies besides a country's domestic currency. It explains the different types of foreign exchange rate systems - fixed, flexible, and managed floating - and how exchange rates are determined by the interaction of supply and demand in foreign exchange markets. Factors that influence demand and supply of foreign exchange are also outlined.

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    Foreign Exchange Rate

    • Prepared By:- Atul Kumar Rai PGT Economics Kendriya Vidyalaya Sangthan
    Foreign Exchange Rate
    Foreign Exchange:- Foreign exchange refers to all currencies other than the domestic currency
    of a given country.

    Exa.-India’s domestic currency is Indian Rupee(₹) and all other currencies like US Dollar($) ,British
    pound(£) etc. Are foreign exchange.

    Foreign Exchange Rate:- Foreign exchange rate refers to the rate at which one currency is
    exchanged for the other .It represents the price of one currency in terms of another currency.

    Exa.- If $ 1 can be exchanged for ₹ 70 ,then value of ₹ 1 will be:


    ₹ 1= 1/70 $
    =.0143 $
    Three Types of Foreign Exchange Rates
    • 1:-Fixed Exchange Rate System(Pegged Exchange Rate System):--
    Fixed exchange rate system refers to a system in which exchange rate for a
    currency is fixed by the government/ Central Bank.
    :Under this system ,each country keeps value of its currency fixed in terms of some
    “External Standard” (like gold ,silver,another country’s currency or even some
    internationally agreed unit of account)
    : When value of domestic currency is tied to the value of another currency ,it is
    known as 'Pegging’

    H.W.- Describe merits and demerits


    of fixed exchange rate system.
    • 2:-Flexible Exchange Rate System (Floating Exchange Rate System):
    • Flexible exchange rate system refers to a system in which exchange rate is
    determined by forces of demand and supply of different currencies in the foreign
    exchange market.

    • There is no official(Government) intervention in the foreign exchange market.

    • H.W. 1:- What is difference between fixed exchange rate and flexible exchange
    rate ?
    • 2:- Describe merits and demerits of flexible exchange rate system .
    • 3:- Managed Floating Rate System:-
    It refers to a system in which foreign exchange rate is determined by market
    forces and central bank influences the exchange rate through intervention in the
    foreign exchange market.
    Managed floating is a tool employed by the central bank to restore the value of the
    country's currency (in relation to other currencies) within the desired limits, even
    when exchange rate is determined by the market forces of demand and supply.
    In fact, managed floating may be called as the mixture of both flexible and fixed
    exchange rate systems. It comprises the element of flexible exchange rate system
    as the exchange rate is primarily determined by the forces of supply and demand.
    Likewise, it comprises the element of fixed exchange rate system as the exchange
    rate is moderoe (or managed) by way of intervention by the RBI.

    H.W. - What is difference between flexible exchange rate and managed floating
    exchange rate ?
    Demand for Foreign Exchange
    1:- Imports of Goods and Services 2:- Tourism 3:- Unilateral Transfers send abroad
    4:- Purchase of assets in foreign countries 5- Repayment of international loan
    etc.
    Demand Curve of Foreign Exchange:-
    Demand curve of foreign exchange slope
    Downwards due to inverse relationship
    Between demand for foreign exchange and
    Foreign exchange rate.
    Supply of foreign Exchange:- 1:- Exports of goods and services 2:- Foreign
    investment 3:- Remittances(Unilateral transfers) from abroad 4- Loan from rest of
    the world. 5- Grant and donation from rest of the world etc.

    Supply Curve of Foreign Exchange:- Supply


    Curve of foreign exchange slope upwards due
    To positive relationship between supply for
    Foreign exchange and foreign exchange rate.
    Determination of Exchange Rate in a Free Market
    Like the price of a commodity ,flexible exchange rate is determined by the
    interaction of the forces of demand
    And supply.The equilibrium exchange rate is
    Determined at a level where demand for
    Foreign exchange is equal to the supply of
    Foreign exchange.
    Depreciation vs. Devaluation

    Depreciation of the (domestic) currency occurs when the value of the domestic
    currency reduces in the international money market, because of the market forces
    of supply and demand. The government plays no role whatsoever.

    Devaluation of the (domestic) currency occurs when the value of the domestic
    currency is deliberately reduced by the government by raising the exchange rate.
    The market forces of supply and demand play no role whatsoever.
    Appreciation vs. Revaluation

    Appreciation of the (domestic) currency occurs when the value of the domestic
    currency rises in the international money market, because of the market forces of
    supply and demand. The government plays no role whatsoever.

    Revaluation of the domestic) currency occurs when the value of the domestic
    currency is deliberately raised by the government by lowering the exchange rate.
    The market forces of supply and demand play no role whatsoever.
    Q:- 1-‘Many large multinational corporations (MNCs) have recently shifted their
    investment from China and have started their production in India ,thereby boosting
    the Make in India plans of the Government’.
    Presuming other factors being constants, discuss the effects of the given statement
    on foreign exchange rate with reference to the Indian Economy.
    Q-2- True or false: give reason-
    Managed floating Exchange rate is decide by market forces but remains within a
    specific range as decide by central bank..
    Q-3- According to recent media reports:. “USA has accused China of currency
    devaluation to promotion its export” .In the light of the given media report
    comment, how exports can be promote through the Currency devaluation ?

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