Exchange rates

What is an exchange rate?

• An exchange rate is the price of one currency expressed in terms of
another currency.
• The exchange rate determines how much of one currency has to be
given up in order to buy a specific amount of another currency.
Types of exchange rates.
Floating exchange rate
A floating exchange rate or fluctuating exchange rate is a type of
exchange rate regime wherein a currency’s value is allowed to
fluctuate according to the foreign exchange market. A currency that
uses a floating exchange rate is known as a floating currency. The
dollar is an example of a floating currency.
Fixed exchange rate
• A fixed exchange rate system or pegged exchange rate system is a
currency system in which governments try to maintain a currency
value that is constant against a specific currency or good.
• It is a type of exchange rate regime where a currency value is fixed to
a measure of value,such as gold or another currency.
Pegged float exchange rate
Pegged floating currencies are pegged to some band or value, which is
either fixed or periodically adjusted. These are a hybrid of fixed and
floating regimes. There are three types of pegged float regimes:
• Crawling bands
• Crawling pegs
• Pegged with horizontal bands
Impact of exchange rate
1. Impact on economy
Exchange rate fluctuation has a significant impact on the overall
economy of a country. Rupee appreciation against U.S. Dollar is an
indication of the strengthening of Indian economy with respect to U.S.
economy.
2. Impact on foreign investors
If a foreign investor invest in Indian stock market and even if it’s
value does not change in 1st year, earn profit if rupee appreciates and
make a loss if it depreciates.
3. Impact on industry/companies
Appreciation of the rupee makes imports cheaper and exports
expensive. So,it can spell good news for companies who rely on import
of goods like heavy machinery, technology,micro chips, etc.
4. Impact on debt
A depreciating rupee is not only impacting the import bill it has also
severely affected the cost of borrowing for the corporate sector.
Factors influencing exchange rate
• Change in the demand and supply of foreign exchange
• State of international change
• Monetary policy
• Capital movement
• Industrial factors
• Currency condition
• Political conditions
• Exchange control
• Banking condition
• National income