Introduction Determination of exchange rates

1. Submitted By:
Ankush Jain
Ashwin Pathak
Chetna Chaudhary
Daksh Goyal
Submitted To:
Abhishek Singh

2. FOREIGN EXCHANGE
• Foreign Exchange refers to the mechanism of the ways and means by which
payment in connection with International Trade are effected.
• Foreign exchange refers to all currencies other than the domestic currency of
a given country.
• For example- India’s domestic currency is Indian Rupee and all other
currencies like US dollar, British Pound etc are foreign exchange.
• The rate of exchange is the price of one currency expressed in terms of
another currency, it is the reflection of the external value of the domestic
currency.
• It should also be noted here that exchange rate is not always constant, it goes
on changing from time to time o account of change in demand for and supply
of foreign currency.

3. FACTORS INFLUENCING EXCHANGE RATES
1. Differentials in Inflation.
2. Differentials in Interest Rates.
3. Public Debt.
4. Terms Of Trade.
5. Political Stability And Economic Performance.

4. WHY IS IT NEEDED???.....
Different countries have different currencies with different
values.
Example: India – Rupees
America -Dollar
When trade takes place, the persons of these countries have
to convert their currencies to other country’s currencies to
make payments. For this purpose the concept of foreign
exchange come into operation.

5. FOREIGN EXCHANGE RATE
It 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.
Types-
1. Fixed exchange rate system
2. Flexible exchange rate system
3. Managed floating rate system

6. CURRENCY DEPRECIATION VS. CURRENCY
APPRECIATION
CURRENCY DEPRECIATION
I. It refers to decrease in the value of
domestic currency in terms of
foreign currency.
II. It makes domestic goods cheaper
in foreign country as more and
more of goods can now be
purchased with same amount of
foreign currency. So, it leads to
increase in exports.
III. A change from $1=55 to $1=60
represents that Indian Rupees is
depreciating.
CURRENCY APPRECIATION
I. It refers to increase in the value
of domestic currency in terms
of foreign currency.
II. It makes foreign goods cheaper
in domestic country as more
and more of goods can now be
purchased with same amount
of domestic currency. So, it
leads to increase in imports.
III. A change from $1=60 to
$1=55 represents that Indian
Rupees is appreciating.

7. FIXED EXCHANGE RATE SYSTEM
It refers to a system in which exchange rate for a currency is fixed by the
government.
Basic purpose of adopting this system is to ensure stability in foreign trade and
capital market.
Under this system, each country keeps value of its currency fixed in terms of
some ‘external Standard’.
FLEXIBLE EXCHANGE RATE SYSTEM
• It refers to a system in which exchange rate is determined by forces of
demand and supply of different currencies in foreign exchange market.
•There is no official (government) intervention in foreign exchange market.
•Also known as ‘floating exchange rate’.

8. 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 foreign exchange market.
It is a hybrid of a fixed exchange rate and a flexible exchange rate
system.
Aim is to keep exchange rate close to desired targets value.
Also known as ‘Dirty floating’.

9. DEMAND FOR FOREIGN EXCHANGE
The demand (or outflow) of foreign exchange comes from those
people who need it to make payment in foreign currency.
It is demanded by the domestic residents for the following reasons :
1. Imports of Goods and services.
2. Tourism
3. Unilateral transfer sent abroad
4. Purchase of assets in foreign countries
5. Speculation

10. DEMAND CURVE OF FOREIGN EXCHANGE
DEMAND CURVE OF FOREIGN EXCHANGE SLOPES DOWNWARDS
DUE TO INVERSE RELATIONSHIPS BETWEEN DEMAND FOR
FOREIGN EXCHANGE AND FOREIGN EXCHANGE RATE.

11. SUPPLY OF FOREIGN EXCHANGE
The supply (or inflow) of foreign exchange comes from those
people who receive it due to following reasons.
1. Exports of Goods and services.
2. Foreign investment
3. Unilateral transfer from abroad
4. Speculation

12. SUPPLY CURVE OF FOREIGN EXCHANGE
SUPPLY CURVE OF FOREIGN EXCHANGE SLOPES UPWARDS DUE
TO POSITIVE RELATIONSHIPS BETWEEN SUPPLY FOR FOREIGN
EXCHANGE AND FOREIGN EXCHANGE RATE.

13. 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.
DETERMINATION OF EXCHANGE RATE

14. • If the exchange rate rises to OR₂, then demand for foreign
exchange will fall from OQ₂ and supply will rise to OQ₁. It
will be a situation of excess supply. As a result, exchange rate
will fall till it again reaches the equilibrium level of OR.
•If the exchange rate falls to or₁, then demand for foreign
exchange will rise from oq₁ and supply will fall to oq₂. It will
be a situation of excess demand. It will push up the exchange
rate till it reaches OR.
Any Exchange Rate (other than OR) is not the
equilibrium exchange rate

15. FOREIGN EXCHANGE MARKET
Foreign Exchange Market is the market in which foreign currencies are bought
and sold.
The buyers and sellers include individuals, firms, foreign exchange brokers,
commercial banks and the central bank.
• Largest market in the world.
• Market with no central trading location and no set hours of trading.
• Prices and other terms of trade are determined by computerized negotiations.
Functions-
Transfer Function
Credit Function
Hedging Function

16. KINDS OF FOREIGN EXCHANGE MARKETS
1. Spot Market- It refers to the market in which the receipts and
payments are made immediately.
2. Forward Market- It refers to the market in which sale and
purchase of foreign currency is settled on a specific future date
at a agreed upon today.

17. THANK YOU ALL