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Foreign Exchange Rate: Atul Kumar Rai

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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harshu vaidya
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58 views11 pages

Foreign Exchange Rate: Atul Kumar Rai

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.

Uploaded by

harshu vaidya
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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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