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1. FACTORS AFFECTING EXCHANGE R A TE THEORIES OF EXCHANGE R A TE Submitted By: 005 Manpreet 041 Jatin Goyal 044 Mehak Rastogi 059 Shivani Mukhija Submitted To: Dr. Phool Chand

2. Foreign Exchange refers to the mechanism of the ways and means by which payment in connection with International Trade are effected. It refers to all currencies other than the domestic currency of a given country. Exchange Rate: 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. 1. Differentials in Inflation Differentials in Interest Rates Balance of Payment Government Debt Terms of Trade Monetary Policy Economic Strength Resource Discovery Speculation Recession Market Factor Politi c al Sta b i l ity And E c o n omic Perfo r m an c e

4. CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION I II . CURRENCY APPRECIATION It refers to increase in the value of domestic currency in terms of foreign currency. 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. A ch a nge f r om $1=6 to $1=55 represents that Indian Rupees is appreciating. CURRENCY DEPRECIATION III. It refers to decrease in the value of domestic currency in terms of foreign currency. 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. A change from $1=55 to $1=60 represents that Indian Rupees is depreciating.

5. It refers to the rate at which one currency is exchanged for the other. It repre s ents the price of one c u r r e n cy in t erms of another currency. Types- Fixed exchange rate system Flexible exchange rate system Managed floating rate system

6. 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’. It re f e r s t o a sys t em i n w h i c h exc h a n g e rate i s d ete r m i n ed b y f o r ces of demand and supply of different currencies in foreign exchange market. There is no official (government) intervention in foreign exchange market. A lso know n as ‘ f loat i ng exc h an g e rate’.

7. 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’.

8. 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 : Imports of Goods and services. Tourism Unilateral transfer sent abroad Purchase of assets in foreign countries Speculation

9. The supply ( o r infl o w ) of foreign exc h ange co m es from those people who receive it due to following reasons. Exports of Goods and services. Foreign investment Unilateral transfer from abroad Speculation

10. DEMAND AND SUPPLY OF EXCHANGE RATE GROWTH THEORY OF EXCHANGE RATE BALANCE OF PAYMENT(BOP) THEORY OF EXCHANGE RATE