Exchange rate determination,Exchange rate,Exchange rate

Exchange rate determination
Exchange rate
Exchange rate

1. Exchange rate determination Submitted By: SUNNY KUMAR THAKUR PGP25380 AVINASH SINGH (PGP25425) VED PRAKASH(PGP25405) SIMRAN KUMARI(PGP25359)

2. Exchange rates the supply and demand for currencies in the foreign exchange market. Exchange rates are the price of one country's currency in relation to another . Exchange rate Foreign exchange refers to all currencies other than the domestic currencies of a given country. For example: - If $1 can be exchanged for Rs 83, then value of Rs 1 will be : Rs1 = 1/83$ = 0.012$ Factors Affecting the Exchange Rate Economic -Variation in foreign exchange rates are inflation, trade balances, government policies. political - change in the foreign exchange rate are political unrest or instability in the country and any kind of political conflict psychological - the forex rate is the psychology of the participants involved in foreign exchange.

3. Fixed Exchange Rates System (Pegged Exchange rate) the weaker currency of the two currencies in question is pegged or tied to the stronger currency. Fixed exchange rate is determined by the government of the country or central bank and is not dependent on market forces It ensures stability in foreign exchange that encourages foreign trade. There is a stability in the value of currency which protects it from market fluctuations. It promotes foreign investment for the country. It helps in maintaining stable inflation rates in an economy. . Types of Foreign Exchange Rates

4. Flexible Exchange Rates System (Floating Exchange rate) the floating exchange rate system as it is dependent on the market forces of supply and demand. There is no intervention of the central banks or the government in the floating exchange rate system. There is no need to maintain foreign reserves in this exchange system. Any deficiencies or surplus in Balance of Payment is automatically corrected in this system. Managed Floating Rate System T he combination of the fixed (managed) and floating exchange rate systems. Under this system the central banks intervene or participate in the purchase or selling of the foreign currencies . Types of Foreign Exchange Rates

5. Currency Appreciation Currency appreciation is the increase in the value of one currency relative to another currency. Countries use currency appreciation as a strategic tool to boost their economic prospects. Currency Depreciation Currency depreciation is a fall in the value of a currency in a floating exchange rate system Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation. Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy. Measuring Exchange Rate Movements

6. R evaluation A revaluation is a calculated upward adjustment to a country's official exchange rate relative to a chosen baseline, such as wage rates, the price of gold, or a foreign currency. In a fixed exchange rate regime, only a country's government, such as its central bank, can change the official value of the currency. Devaluation Devaluation is the deliberate downward adjustment of a country's currency value. The government issuing the currency can decide to devalue its currency. Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits. Measuring Exchange Rate Movements

7. At the equilibrium exchange rate,  the supply and demand for a currency are equal . Shifts in the supply or the demand for a currency lead to changes in the exchange rate Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country's economic health. A higher-valued currency makes a country's imports less expensive at home and its exports more expensive in foreign markets. Exchange rates are always relative and are expressed as a comparison of the currencies of two countries. E quilibrium exchange rate

8. Factors influencing exchange rates Interest Rates: Higher rates attract foreign investment, increasing currency value; lower rates can lead to depreciation Inflation Rates: Low inflation boosts currency value; high inflation causes depreciation. Economic Stability and Growth: Strong economies attract investment, increasing currency value. Balance of Payments / Trade Balance: Trade surplus leads to appreciation; trade deficit causes depreciation. Foreign Exchange Reserves: Large reserves help maintain currency value through intervention. Political Stability: Stable political environments support stronger currencies; instability weakens currencies. Government Intervention: Central banks may adjust interest rates or buy/sell currencies to influence exchange rates. Global Events: Disasters, conflicts, or global shocks can disrupt markets and affect currency values .

9. Conclusion Market forces of supply and demand are key in determining the value of a currency. Government and central bank interventions can stabilize or manipulate exchange rates. Global events and political stability play a significant role in investor confidence, impacting currency values. Speculation by traders contributes to short-term fluctuations in exchange rates. The interaction of these factors makes exchange rate determination a complex and dynamic process .