FOREIGN EXCHANGE

PRESENTED BYTANVI BARHAI(21)

AMIT RAJ(29)
ABHISHEK PANDEY(45)
SOHAM GHOSH(53)
AKASH RATNA PRIYA(44)
DEEPAK KUMAR(39)
SAURABH SHUKLA(52)
AMRIT MOHANTY(28)

INTRODUCTION
Exchange

Rate is the rate at which one

currency will be exchanged for another.

It

is regarded as the value of one

countrys currency in terms of another
currency.

Example,91

Japanese yens exchange

rate to the USD means 1 USD will be
exchanged for 91 yen.

 Exchange rates are determined in

the forex market,which is open for
trading for 24 hours a day except
weekends.
2 major concepts-spot exchange
rate which is the current rate and
forward exchange rate which is
done for a future date.
In the retail market different
buying and selling rates are
quoted which incorporate an

FACTORS AFFECTING EXCHANGE RATE

Exchange rates are determined by demand and
supply. factors influencing are: Inflation-countries

with lower inflation rates

tend to see appreciation.
Interest Rates-higher interest rates cause an
appreciation.
Current account deficits-country spending
more on foreign trade.
Public debt-initiates inflation.
Terms of trade-balance of payments
Political instability.

FOREIGN
EXCHANGE
MARKET

Foreign Exchange Market

Foreign

exchange market is that market in

which national currencies are traded for one
another.
Commercial banks, forex brokers, exporters,
importers and investors and other monetary
authorities.
Types of Forex Market
1. On the basis of transaction:
Spot market
Forward market
2. On the basis of structure:
Retail market
Wholesale market

Characteristics Of Foreign Exchange

Market
1.

2.
3.

4.
5.

It has huge trading volume representing the

largest asset class in the world leading to
high liquidity.
It has wide geographical dispersion.
Its a continuous operation: 24 hours a day
except weekends, i.e., trading from 22:00
GMT on Sunday (Sydney) until 22:00 GMT
Friday (New York).
Traders can profit from both strong and weak
economies.
It makes extensive use of information
technology, making it available to everyone.

Functions Of Foreign
Exchange Market
Transfers

funds from one country to another.

Provides short term credit to the importers .
Spot and Forward market helps in stabilizing the
foreign exchange rate.

DETERMINANTS OF
FOREIGN EXCHANGE
RATE

DETERMINANTS OF FOREIGN
EXCHANGE RATE
1.

Interest Rate

Whenever there is an increase in interest

rates in
Domestic market there will be increase in
Investment Funds causing a decrease in
demand for
foreign currency and an increase in supply
for
foreign currency

2. Inflation Rate
When inflation increases there will be less
demand for local goods(decreased supply of
foreign currency) and more demand of foreign
Goods(increased demand for foreign currency)

3.Government Budget(Deficit or Surplus)

The market usually react negatively to
widening government budget deficits and
positively to narrowing budget deficits. This will
result in the change in the value of countries
prices.

4.Political Conditions
International, Regional and Political
conditions and events can have a
profound effect on currency
market.

PURCHASING
POWER PARITY

Purchasing Power Parity

CONCEPT
Developed

by GUSTAV CASSEL in 1918.

The

theory states that in ideally efficient markets,

identical goods should have only one price .

Based

on law of one price.

Example

: lets say a pair of shoe costs Rs. 2500

in India. Then it should cost $50 in the US when
the exchange rate is 50 between the dollar and
the rupee.

USAGES & ADVANTAGES

Measured

by finding the value of basket

of consumer goods across economies.
GDP

(PPP) is measured to assess the

cost of living, well being of a countries'
population.
Minimizes

misleading international
comparisons that arise with the use of
market exchange rates.

Rank

country

GDP (US $ BILLION)

United states

16,768

2.

China

16,149

3.

India

6,776

4.

japan

4,667

FIXED EXCHANGE
RATE

FIXED EXCHANGE RATE

A fixed exchange rate, is a type of
exchange rate regime where a currency's
value is fixed against either the value of
another single currency, to a basket of other
currencies, or to another measure of value,
such as gold.
follows

a fixed rate for converting currencies.

the government intervenes to keep the
exchange rate close to a fixed target.
It does not allow major fluctuations from the
central rate.

Advantages
Stability
Keeps

inflation Low

Reduced
Fixed

encourages investment

risk in international trade

rates should eliminate

destabilizing speculation

Disadvantages
Need
Too

large resources

rigid

Loss

of freedom in internal policy

Fixed

rates are inherently

unstable

Flexible or Floating
Exchange Rate

Flexible or Floating Exchange

Rate
A flexible exchange rate is a system
wherein the value of a currency
changes with market demands. When
the demand for a particular currency is
high, the value of that currency goes
up. When demand is low, the value
goes down.

Advantages
No

need for international

management of exchange rates
No need for frequent central
bank intervention
No need for elaborate capital
flow restrictions
Greater insulation from other
countries economic problems

Disadvantages
Higher

volatility

Use

of scarce resources to
predict exchange rates

Tendency

problems

to worsen existing

Impacts of
Exchange Rate

Impacts of Exchange Rate

Trade

Balance
Foreign Investment
Oil Prices
Inflation
Remittances

Trade Balance
Appreciated Currency Depreciated Currency
Exports

Expensive
Imports - Cheap

Exports

Tends to narrow
the gap between
the export and
import and hence
favorable for trade
balance.

Tends to widen the

gap between
exports and
imports and hence
unfavorable for
Trade balance.

- Cheap
Imports
Expensive

Foreign Investment
If the currency depreciates Brings
more foreign investment

Oil Prices and Inflation

In Indian context, depreciated
Rupee or appreciated USD will
increase the oil prices and hence
will lead to oil price linked inflation.

Remittance
Depreciation of a currency will lead
to increased remittances and
hence will increase the forex
reserve.