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Exchange Rate Fluctuation

Exchange Rate Fluctuation

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Published by asifanis

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Categories:Types, Brochures
Published by: asifanis on Feb 26, 2010
Copyright:Attribution Non-commercial

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05/11/2014

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EXCHANGE RATEEXCHANGE RATEFLUCTUATION RISKFLUCTUATION RISK
 
 
INTRODUCTIONINTRODUCTION
Both importers and exporters run the risk of loss due toBoth importers and exporters run the risk of loss due tofluctuations in the foreign exchange rates in internationalfluctuations in the foreign exchange rates in internationalbusiness transactions. An exporter who agrees to a certainbusiness transactions. An exporter who agrees to a certainprice in a foreign currency today may find himself at a lossprice in a foreign currency today may find himself at a lossafter a few months when the actually receives the paymentafter a few months when the actually receives the paymentowing to a fall in the exchange rate of the contractedowing to a fall in the exchange rate of the contractedcurrency. Likewise, an importer’s fortunes may also swingcurrency. Likewise, an importer’s fortunes may also swingup or down with exchange rate movements.up or down with exchange rate movements.For example, let us take an exporter in India who shipsFor example, let us take an exporter in India who ships5,000 shirts at US $ 4.00 each to an exporter in the US,5,000 shirts at US $ 4.00 each to an exporter in the US,and expects to receive the payment after 60 days. Inand expects to receive the payment after 60 days. Intoday’s date at $1.00 = Rs. 46.00, he expects a paymenttoday’s date at $1.00 = Rs. 46.00, he expects a paymentof Rs. 9,20,000.00. After the months, on actual receipt of of Rs. 9,20,000.00. After the months, on actual receipt of payment, the US $ is equal to Rs. 45.30 and he, therefore,payment, the US $ is equal to Rs. 45.30 and he, therefore,receives Rs. 9,06,000.00, incurring a loss of Rs. 14,000.00.receives Rs. 9,06,000.00, incurring a loss of Rs. 14,000.00.This loss is actually due to weakening of the US $ againstThis loss is actually due to weakening of the US $ againstthe Indian rupee.the Indian rupee.
 
 
Exporters in India can avail of forward exchangeExporters in India can avail of forward exchangecovers provided by most commercial banks.covers provided by most commercial banks.Foreign exchange rates are usually quoted asForeign exchange rates are usually quoted asSpot Rates or Forward Rates.Spot Rates or Forward Rates.
Spot RatesSp
 
ot Rates
::
For immediate requirement of For immediate requirement of foreign currency, the purchaser has no choice butforeign currency, the purchaser has no choice butto buy foreign exchange on the spot (current)to buy foreign exchange on the spot (current)market. Spot rates are meant for immediatemarket. Spot rates are meant for immediatedelivery. It is simply the current market ratedelivery. It is simply the current market ratedecided by demand and supply. Spot contractsdecided by demand and supply. Spot contractsare the most basic and widely used foreignare the most basic and widely used foreignexchange contracts. This is an agreement to buyexchange contracts. This is an agreement to buyor sell one currency in exchange for another.or sell one currency in exchange for another.Spot transaction requires the receipt of theSpot transaction requires the receipt of thebought currency in two days and the payment of bought currency in two days and the payment of the sold currency in two days.the sold currency in two days.

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