Foreign exchange rates

Meaning of foreign Exchange

The term exchange implies two things : a) Foreign currency b) exchange rates Foreign exchange generally refers to foreign currency . The other part of foreign exchange is exchange rate which is the price of one currency in terms of the other currency.

Meaning of foreign Exchange

Forex is international market for free trade of currencies. traders place order to buy one currency with another currency. It is also regarded as the value of one countrys currency in terms of another currency. Eg: An increase in the value of the Australian dollar is good if you are planning to travel overseas, as it means you can buy more foreign money. If the dollar falls, then you may have to spend more Australian money to buy another currency.

Why it is needed
Different countries have different currencies with different values. Example: India - Rupees America -Dollar China - Yuan When trade takes place.. the persons of these countries have to convert their currencies to other countries currencies to make payments.

Why it is needed
For this purpose the concept of foreign exchange come into operation. Under mechanism of international payments, the currency of a country is converted in to the currency of another country through FOREIGN EXCHANGE MARKET. The effect of globalization and international trade Increased import and export

Factors influencing exchange rates

national economic performance central bank policy interest rates trade balances: import, export political factors-such as elections and policy changes market sentiments- expectations and rumors unforeseen events

Foreign exchange market

foreign exchange market is that market in which national
currencies are traded for one another. the major participants in this market are banks, forex broker, authorized dealer and monetary authorities. besides, transfer of funds from one country to another speculation is an important dimension of foreign exchange market. its where money in one currency is exchanged for another.

Advantages of forex market

it is already the worlds largest market and still growing quickly. traders can make profit from both weak and strong economy. trader can place very short term order which are prohibited in some other country. the market is not regulated the market is open 24 hrs a day during weekday.

Types of exchange rates

Nominal:
Is the relative price of the currency of the two countries. E.g. if the exchange rate of USD and INR is Rs.50 per USD, then you can exchange 1 USD for Rs. 50 in the world market for foreign currency.

REAL
It is the relative price of the goods of the two countries. It seeks to measure the value of a countrys goods against those of another country, a group of countries, or the rest of the world, at the prevailing nominal exchange rate. It tells us the rate at which we can trade the goods of one country for the goods of another. Also called the terms of trade.

Spot and forward

Spot rate the rate of exchange at which the seller at the spot makes the delivery of foreign exchange to the buyer Forward rate that rate at which the seller contracts to deliver to the buyer foreign exchange at some future date at a rate settled in the present.

Floating and fixed rates

Floating :

Rates determine in the foreign exchange market by the market forces of demand and supply without the government intervention. Under the flexible exchange rate system, the rate of exchange is allowed to vary to suit the economic policies of the government. Flexible exchange rates are exchange rates, which fluctuate according to market forces. The value of the currency is determined solely by the forces of demand and supply in the exchange market.(self correcting mechanism)

Fixed
It is the system of following a fixed rate for converting currencies. In this system, the government (or the central bank acting on its behalf) intervenes in the currency market in order to keep the exchange rate close to a fixed target. It does not allow major fluctuations from the central rate.