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FOREI

GNEXCHANGERATE
MEANI
NGOFFOREI
GNEXCHANGERATE:
Allcount
ri
eshav et
hei
rowncur
renci
eswhichar
erapidl
yaccept
abl
ewit
hinthei
rrespect
ive
ter
rit
ori
es.Forexampl
e,I
ndi
anrupeei
nIndi
a,USdol
lari
nAmer i
ca,
PoundinEngland,et
c.

Howev er,
currencyofonecountr
yisgener
all
ynotaccept
edinsomeothercount
ry.I
ncaseofan
i
nternati
onalpayment,cur
rencyofonecount
ryhastobeconver
tedint
othecurr
encyofanot
her
countrybecauseeverycountr
ywantsthepaymenti
nitsowncurr
ency.

For
eignexchanger
ater
efer
stot
her
atewhi
chonecur
rencyi
sexchangedf
ort
heot
her
s.

I
trepr
esent
sthepr
iceofonecur
rencyi
nter
msofanot
hercur
rency
.

DI
FFERENCEBETWEENCURRENCYAPPRECI
ATI
ON
ANDCURRENCYDEPRECI
ATI
ON
BASI
S CUURENCYDEPRECI
ATI
ON CURRENCY
APPRECI
ATI
ON

MEANI
NG Itr
efer
st odecr
easeinthev
alueof I
treferstoincreasei nt
hev al
ue
domesticcurr
encyi
nt er
msofforei
gn ofdomest i
ccur rencyinter
msof
curr
ency.(moreofRsispai
dforUS$) for
eigncurrency.(lessofRsis
pai
df orUS$)

EFFECTON Itmakesdomesticgoodscheaperi
n Itmakesforei
gngoodscheaper
I
MPORTS/ for
eigncountr
yasmor eofsuch i
ndomest iccountryasmoreof
EXPORTS goodscannowbepur chasedwiththe suchgoodscannowbe
sameamountoff orei
gncurr
ency.So, purchasedwit
ht hesame
i
tleadstoincr
easeinexpor
ts. amountofdomest i
ccur
rency
.
So,itl
eadstoincreasei
n
i
mpor ts.

EXAMPLE Achangefrom $1=55/-


(Indi
anr
upee) Achangefr
om $1=60/ -(I
ndian
t
o$1=60/ -repr
esentsthatI
ndi
an r
upee)to$1=55/-r
epresents
r
upeesisdepreciat
ing. t
hatIndi
anrupeeisappreci
ating.

EEFECTOFAPPRECI
ATI
ONOFDOMESTI
CCURRENCYON
I
MPORTS:
Appreci
ati
onofdomest
iccurr
encymeansar i
seinthepr
iceofdomesti
ccurr
encyi
nter
msofa
for
eigncurr
ency
.Now,onerupeecanbeexchangedformore$,i
.e.wi
thsameamountofmoney
,
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7877973935
moregoodscanbepurchasedf
rom USA.I
tleadst
oincr
easei
nimpor
tsf
rom USAasAmer
ican
goodswil
lbecomer
elati
vel
ycheaper
.

TYPESOFFOREI
GNEXCHANGE:

FI
XEDEXCHANGERATESYSTEM:
Fixedexchangerat
esy
stem r
efer
stoasy
stem i
nwhi
chexchanger
atef
oracur
rencyi
sfi
xedby
thegovernment.

FLEXI
BLEEXCHANGERATESYSTEM:
Flexibl
eexchanger
atesy
stem r
efer
stoasy stem i
nwhichexchangerat
eisdet
erminedby
forcesofdemandandsupplyofdi
ff
erentcurr
enciesi
ntheforei
gnexchangemarket
.

BASI
S FI
XEDEXCHANGE FLEXI
BLEEXCHANGE
RATE RATE

DETERMI
NATI
ONOF I
tisoff
ici
all
yfixedinter
msof Iti
sdetermi
nedbyfor
cesof
EXCHANGERATE gol
doranyot hercurr
encyby demandandsupplyoffor
eign
gover
nment. exchange.

GOVERNMENTCONTROL Ther
eiscompl
ete Ther
eisnogov
ernment

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7877973935
governmentcont
rolasonl
y i
nterventi
onandi
tfl
uct
uat
ed
governmenthasthepowerto fr
eelyaccordi
ngt
omarket
changeit
. conditi
ons.

STABI
LITYI
NEXCHANGE Theexchanger
ategener
all
y Theexchanger
atekeepson
RATE remai
nsstabl
eandonlya changi
ng.
smal
lvar
iat
ioni
spossi
ble.

DEMANDFORFOREI
GNEXCHANGE
(
all
itemswhi
chl
eadst
oout
fl
owofmoney
)

Thedemand(orout
flow)offoreignexchangecomesfrom t
hosepeopl
ewhoneeditt
omake
paymenti
nfor
eigncurrency
.Itisdemandedbyt hedomesti
cresi
dent
sfort
hef
oll
owingr
easons:

1)I
mpor
tsofgoodsandser
vices:For
eignexchangei
sdemandedt
omaket
hepay
mentf
or
i
mpor
tsofgoodsandser
vices.

2)Tour
ism:
For
eignexchangei
sneededt
omeetexpendi
tur
eincur
redi
nfor
eignt
our
s.

3)Unil
ater
alt
ransf
ersentabroad:
Foreignexchanger
equi
redf
ormaki
nguni
l
ater
al
tr
ansfer
sli
kesendi
nggiftstoothercount
ri
es.

4)Purchaseofassetsinforei
gncountr
ies:I
tisdemandedtomakepay
mentf
orpur
chase
ofassets,
li
keland,shares,
bonds,et
c.inthefor
eigncount
ri
es.

5)Speculati
on:Demandf orf
orei
gnexchangear
iseswhenpeopl
ewantt
omakegai
nsf
rom
appreciat
ionofcur
rency.

SUPPLYOFFOREI
GNEXCHANGE
(
all
itemswhi
chl
eadst
oinf
lowofmoney
)

Thesuppl
y(infl
ow)off
orei
gnexchangecomesf
rom t
hosepeopl
ewhor
ecei
vei
tduet
o
fol
l
owingreasons.

1.Expor
tsofgoodsandser
vices:
Suppl
yoff
orei
gnexchangecomest
hroughexpor
tsof
goodsandservi
ces.

2.Forei
gninvest
ment:Theamount,whi
chf
orei
gner
sinv
esti
nthehomecount
ry,
incr
eases
thesuppl
yofforei
gnexchange.

3.Remi
tt
ances(
uni
l
ater
alt
ransf
ers)f
rom abr
oad:
Suppl
yoff
orei
gnexchangei
ncr
easesi
n
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7877973935
t
hef
orm ofgi
ft
sandot
herr
emi
tt
ancesf
rom abr
oad.

4.Specul
ati
ons:Suppl
yoff or
eignexchangecomesf
rom t
hosewhowant
stospecul
ateon
theval
ueoffor
eignexchange.

DETERMI
NATI
ONOFEXCHANGERATE
Theequi
l
ibri
um exchangeratei
sdeterminedatal
evel
wher
edemandf
orf
orei
gnexchangei
s
equal
tothesupplyoffor
eignexchange.

Asseeni nthi
sdiagram,demandandsupplyofforeignexchangearemeasuredont heX-axi
s
andther at
eofforei
gnexchangeonY-axi
s.Di st
hedownwar dsl
opingcurveoffor
eign
exchangeandSi stheupwardslopi
ngsupplycurveofforei
gnexchange.Boththecurves
i
ntersecteachotheratpoi
nt‘
E’.Theequi
li
brium exchangeratei
sdeterminedatpointE.

CHANGESI
NEXCHANGERATE
Theequi
li
bri
um exchanger
atewi
l
lbedi
stur
bedi
fsomechangesoccuri
nthedemandorsuppl
y
off
orei
gnexchange.

CHANGEI
NDEMAND
1.Incr
easei
ndemand: Ani
ncreasei
ndemandforf
orei
gnexchangewi
l
lshi
ftt
hedemand
curvet
owardsri
ght&willl
eadtoDEPRECI
ATIONOFDOMESTI CCURRENCY.(mor
eof
rupeei
spaidforev
eryUS$)

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7877973935
2.Decreaseindemand:Adecr easei
ndemandforf
orei
gnexchangewi
l
lshi
ftt
hedemand
curvetowardslef
t&wi l
ll
eadtoAPPRECI
ATIONOFDOMESTI CCURRENCY.(l
essof
rupeeispaidforever
yUS$)

CHANGEI
NSUPPLY
3.Incr
easeinsuppl
y:I
fsuppl
yoffor
eignexchangei
ncr
eases,
itwi
ll
leadt
oaright
ward
shif
tinsupply
.wi
lll
eadtoAPPRECIATI
ONOFDOMESTI CCURRENCY.(l
essofrupeei
s
paidforever
yUS$)

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7877973935
4.Decreaseinsuppl
y:Ifsuppl
yoff
orei
gnexchangedecr
eases,
itwi
l
lleadt
oaleftward
shi
ftinsupplywil
ll
eadtoDEPRECIATI
ONOFDOMESTI CCURRENCY. (moreofrupeei
s
pai
df orever
yUS$)

FOREI
GNEXCHANGEMARKET
For
eignexchangemar
keti
sthemar
keti
nwhi
chf
orei
gncur
renci
esar
eboughtandsol
d.

FUNCTI
ONSOFFOREI
GNEXCHANGE:

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7877973935
1.Transf
erfuncti
on:Itt
ransferspurchasi
ngpowerbetweenthecount
ri
esinv
olvedi
nthe
tr
ansacti
ons.Thisfuncti
onisper f
ormedt hr
oughcr
editi
nstr
umentsl
ikebi
ll
soffor
eign
exchange,bankdraft
sandt elephoni
ctransfer
s.

2.Credi
tfunct
ion:
Itpr
ovidescr
edi
tforfor
eigntr
ade.Bi
ll
sofexchange,
wit
hmat
uri
ty
peri
odofthreemonths,ar
egener
all
yusef ori
nter
nat
ional
payments.

3.Hedgingf
unct
ion:
Whenexpor t
ersandi
mportersent
eri
ntoanagreementtosel
landbuy
ofgoodsonsomef ut
uredat
eatthecur
rentpri
cesandexchangerat
e,i
tcal
ledhedgi
ng.

KI
NDSOFFOREI
GNEXCHANGEMARKET
Forei
gnexchangemarket
sareclassi
fi
edonthebasi
sofwhet
hert
hef
orei
gnexchange
tr
ansact
ionsarespotorf
orwar
d.Accordi
ngl
y,t
herearet
woki
ndsoff
orei
gnexchangemar
ket
s:

1.Spotmar
ket

2.For
war
dmar
ket

Spotmar
ket
:Spotmar
ketr
efer
stot
hemar
keti
nwhi
cht
her
ecei
ptsandpay
ment
sar
e
madei
mmedi
atel
y.

For
war
dmar
ket
:For
war
dmar
ketr
efer
stot
hemar
keti
nwhi
chsal
eandpur
chaseof
f
orei
gncur
rencyi
sset
tl
edonaspeci
fi
edf
utur
edat
eatar
ateagr
eedupont
oday
.

MANAGEDFLOATI
NGRATESYSTEM
I
treferst
oasy st
em i
nwhichforeignexchangerateisdetermi
nedbymar ketfor
cesandcent
ral
bankinfl
uencest
heexchangeratethr
oughi nt
ervent
ioninthefor
eignexchangemarket
.

 I
tisahy
bri
dofaf
ixedexchanger
ateandaf
lexi
bleexchanger
atesy
stem.

 Inthi
ssy st
em, cent
ralbankinter
venesinthefor
eignexchangemarkett
orest
ri
ctthe
fl
uctuati
onsintheexchanger atewit
hincert
ainl
imit
s.Theaimistokeepexchangerat
e
closetodesir
edt ar
getvalues.

 Forthi
s,cent
ral
bankmaint
ainsreser
vesoffor
eignexchanget
oensur
ethatt
he
exchangerat
estay
swit
hinthetarget
edval
ue.

 I
tisal
soknownas‘
dir
tyf
loat
ing’
.

UMANGKHATRI
7877973935
DI
FFERENCEBETWEENDEPRECI
ATI
ONAND
DEVALUATI
ON

UMANGKHATRI
7877973935