INTRODUCTION

INTRODUCTION OF
OF FOREIGN
EXCHANGE
FOREIGN EXCHANGE

BY NISHCHAY
RATWAYA
CONTENTS

o Introduction
o Factors affecting Exchange Rate

o Foreign Exchange System

o Type of exchange rate Systems

• Fixed Exchange Rate System

• Floating Exchange Rate system

• Pegged Float Exchange Rate system

INTRODUCTION
• FOREIGN EXCHANGE, OR FOREX,
IS THE CONVERSION OF ONE
COUNTRY'S CURRENCY INTO
ANOTHER .
• FOR EXAMPLE, ONE CAN SWAP
THE U.S. DOLLAR FOR THE EURO.
 WHAT IS FOREIGN EXCHANGE RATE

The rate of exchange is the rate at which one currency is

exchanged for another.
It represents the price of one currency in terms of another
currency.
Foreign exchange transactions can take place on the foreign
exchange market, also known as the Forex Market.
FACTOR AFFECTING EXCHANGE RATE
 FOREIGN EXCHANGE SYSTEM

• An exchange rate regime is a system set up by a country's monetary authority,

often the central bank, to manage its currency's exchange rate relative to
other currencies.
OR
The way in which an authority manages its currency in relation to other
currencies and the foreign exchange market.
• An exchange rate regime is a guideline for managing national debt.
 THREE TYPES OF EXCHANGE RATE SYSTEMS

• Floating exchange rate system

• Fixed exchange rate system
• Pegged float exchange rate system
/managed floating exchange rate system
 FLOATING EXCHANGE RATE SYSTEM:-
• Determined by the market forces of demand and supply in respect of a particular foreign
currency
• Under this rate, it is not governed by any one and is not fixed
• Also known as ‘flexible exchange rate system’.
• Exchange rates fluctuate based on economic conditions and investor sentiment.
• Example : India (Managed Float), USA, Australia, Canada, Japan.
 FIXED EXCHANGE RATE SYSTEM:-
• It is a currency system in which governments try to maintain a currency value that is constant against a
specific currency or good
• Also called as pegged exchange rate system
• To ensure that a currency will maintain its "pegged" value, the country's central banks maintain reserves of
foreign currencies and gold.
• Advantages include stability in foreign exchange, protection from market fluctuations, and promotion of
foreign investment.
• Disadvantages include the need for constant foreign reserves and limited flexibility during economic shocks.
• Example: UAE, Qatar, Oman, Saudi Arabia etc.
 PEGGED/MANAGED FLOAT EXCHANGE RATE SYSTEM:-
• 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.
• Managed Float exchange Rate has concept of Revaluation and Devaluation of currency
• Also known as 'Dirty floating’.
FLEXIBLE EXCHANGE RATE CURVE