Foreign Exchange Determination Business

Foreign exchange, often abbreviated as forex or FX, refers to the global marketplace where currencies are traded. It operates 24 hours a day, five days a week, and involves the exchange of one currency for another at an agreed-upon rate. This market is vital for international trade and investment, as it facilitates currency conversion, allowing businesses and investors to engage in cross-border transactions. The forex market is the largest and most liquid financial market in the world, with a daily trading volume exceeding $6 trillion. Its dynamics are influenced by a myriad of factors, including economic indicators, geopolitical events, and market sentiment.

1. F O R E I G N E XC H AN G E 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.

2. F AC T OR S IN FL U E NCIN G E XCHANG E R A TE S Differentials in Inflation. Differentials in Interest Rates. Public Debt. Terms Of Trade. Poli t ical Stabi li t y A n d Economic P er f ormance.

3. W H Y I S I T N EE D E D ???..... 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.

4. 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- Fixed exchange rate system Flexible exchange rate system Managed floating rate system

5. CURREN C Y D EPREC I A T I O N V S . CURREN C Y APPRECIATION CURRENCY DEPRECIATION 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. III. 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 change from $1=60 to $1=55 represents that Indian Rupees is appreciating.

6. F IX E D E XC H AN G E R A T E SYS TE M 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’.

7. MANA G E D FL O A T IN G R A T E S Y S TE M 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. DEMAN D F O R F O R E I G N E XC H AN G E 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. 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.

10. S U PP L Y O F F OR E IG N E XCHANG E The supply (or infl o w) of foreign ex c 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

11. 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.

12. 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. D ETE R M IN A T IO N O F E XCHANG E R A T E

13. If the exchange rate rises to OR ₂ , then demand for foreign exchange will fall from OQ ₂ and supply will rise to OQ ₁ . 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 or ₁ , then demand for foreign exchange will rise from oq ₁ and supply will fall to oq ₂ . 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

14. F OR E IG N E XCHANG E M ARK E T 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- T ransfer Function Credit Function Hedging Function

15. KINDS OF FOREIGN EXCHANGE MARKETS Spot Market- It refers to the market in which the receipts and payments are made immediately. 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.

16. T H AN K Y O U AL L