Foreign Exchange Rate
Foreign Exchange Rate
Foreign Exchange Rate
much one currency is worth in terms of other. For example an exchange rate of 50indian rupees to US Dollar means that INR 50 is worth same as USd 1. Quotations An exchange rate quotation is given by stating the number of units of term currency that can be bought in terms of 1 unit currency known as base currency. For example, in a quotation that says the USD/INR exchange rate is 50 i.e 50 Rs for each US dollar,the term currency is INR and the base currency is USD
Interbank Quote Vs. Merchant Quote Merchant quote is given by a bank to its retail customers. On the other hand, a quote given by one bank to another or any other player in interbank market is called interbank quote. According to FEDAI rules, exchange rates in the merchant as well as interbank markets are to be quoted up to 4 decimals, with last two digits being in multiples of 25(for example: Rs/ $:48.6250/75). The card rates of banks should be either quoted in two decimals, or quoted in 4 decimals with last two digits being 0.
More recent approaches in modeling the RER employ a set of microeconomic variables, such as relative productivity and the real interest rate differential NR=(RR+1)(Expected inflation+1)-1 Bilateral Vs Effective exchange rate Bilateral exchange rate involves a currency pair, while effective exchange rate is weighted average basket of foreign currencies, it can be viewed as an overall measure of countrys external competitiveness. A nominal effective exchange rate(NEER)is weighted with trade weights. A real effective exchange rate (REER) adjusts NEER by appropriate foreign price level and deflates by the home country price level. Compared to NEER, a GDP weighted effective exchange rate might be more appropriate considering the global investment phenomenon.