Unit 1 introduction to currency markets

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introduction to currency market

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Unit 1 introduction to currency markets

  1. 1. Introduction to Currency Markets
  2. 2. Learning ObjectivesTo Understand• Foreign Exchange & Foreign Exchange Rate• Foreign Exchange Market
  3. 3. Learning Objective – 1 (Meaning of Foreign Exchange Rate)Exchange rate is the price of a country’s currency in terms of another country’s currency.
  4. 4. Learning Objective – 1 (Determination of Exchange Rate)• Gold Standard System • Introduced in the year 1875 • Currency was backed by gold • The difference in price of an ounce of gold between two currencies became the exchange rate for those currencies. • Eventually broke down during the beginning of world war I.
  5. 5. Learning Objective – 1 (Determination of Exchange Rate)• Bretton Wood System • Representatives of different countries, in July 1944 met at Bretton Woods, New Hampshire, USA
  6. 6. Learning Objective – 1 (Determination of Exchange Rate)• Bretton Wood System • A method of fixed exchange rates. • The us dollar replacing the gold standard to become a primary reserve currency. • The US dollar became the only currency that would be backed by gold.
  7. 7. Learning Objective – 1 (Determination of Exchange Rate)• Bretton Wood System • The creation of three international agencies to oversee economic activity: IMF, IBRD & GATT • 1971 marked the end of Bretton Wood System.
  8. 8. Learning Objective – 1 (Determination of Exchange Rate)• Exchange Rate System • Dollarization after Bretton Woods • Fixed exchange rate • Floating exchange rate
  9. 9. Learning Objective – 1 (Determination of Exchange Rate)• Exchange Rate System after Bretton Woods Use of foreign currency in parallel to or instead of Dollarization domestic currency
  10. 10. Learning Objective – 1 (Determination of Exchange Rate)• Exchange Rate System after Bretton Woods The value of a currency is determined by Fixed Exchange Rate the government
  11. 11. Learning Objective – 1 (Determination of Exchange Rate)• Exchange Rate System after Bretton Woods The value of a currency is determined by Floating Exchange demand for and supply of Rate foreign exchange
  12. 12. Learning Objective – 1 (Factors affecting Exchange Rate)• Trade Movement • Control of Foreign Exchange• Capital Flow • Inflation• Granting of Loans • Financial Policy• Sale and Purchase of • Bank Rate Securities • Peace & Security• Speculation • Political Conditions• Protection
  13. 13. Learning Objective – 1 (Factors affecting Exchange Rate)• Trade Movement If Import > Export => Depreciation in the value of the currency Import < Export => Appreciation in the value of the currency
  14. 14. Learning Objective – 1 (Factors affecting Exchange Rate)• Capital Flow When A capital INFLOW take place there is an appreciation in the value of the currency. When A capital OUTFLOW take place there is a depreciation in the value of the currency.
  15. 15. Learning Objective – 1 (Factors affecting Exchange Rate)• Granting of Loans Receiving of loans from a foreign country appreciates the value of the currency
  16. 16. Learning Objective – 1 (Factors affecting Exchange Rate)• Sale and Purchase of Foreign Securities Sale of foreign securities by a country appreciates the value of the currency. Purchase of foreign securities by a country depreciates the value of the currency
  17. 17. Learning Objective – 1 (Factors affecting Exchange Rate)• Speculation (SAY) SPECULATORS EXPECT VALUE OF DOLLAR ↑ PURCHASE DOLLARS TO EARN PROFIT IN FUTURE DEMAND FOR DOLLAR INCREASES RATE OF EXCHANGE OF RUPEE ↓ (IN TERMS OF US DOLLAR)
  18. 18. Learning Objective – 1 (Factors affecting Exchange Rate)• Protection PROTECTION DISCOURAGES IMPORTS DEMAND FOR FOREIGN CURRENCY DECREASES RATE OF EXCHANGE OF RUPEE ↑ (IN TERMS OF US DOLLAR)
  19. 19. Learning Objective – 1 (Factors affecting Exchange Rate)• Exchange Control EXCHANGE CONTROL DISCOURAGES IMPORTS DEMAND FOR FOREIGN CURRENCY DECREASES RATE OF EXCHANGE OF RUPEE ↑ (IN TERMS OF US DOLLAR)
  20. 20. Learning Objective – 1 (Factors affecting Exchange Rate)• Inflation INFLATION IN INDIA INCREASES FALL IN THE VALUE OF RUPEE OUTFLOW OF FOREIGN CAPITAL FROM INDIA (TO AVOID FINANCIAL LOSSES) DEMAND FOR (SAY ) DOLLAR INCREASES RATE OF EXCHANGE OF RUPEE ↓ (IN TERMS OF US DOLLAR)
  21. 21. Learning Objective – 1 (Factors affecting Exchange Rate)• Financial Policy DEFICIT FINANCING INFLATIONARY CONDITIONS FALL IN THE VALUE OF RUPEE OUTFLOW OF FOREIGN CAPITAL FROM INDIA (TO AVOID FINANCIAL LOSSES) DEMAND FOR (SAY ) DOLLAR ↑ RATE OFRATE OF EXCHANGE OF RUPEE ↓ (IN TERMS OF US DOLLAR)
  22. 22. Learning Objective – 1 (Factors affecting Exchange Rate)• Bank Rate BANK RATE INCREASES INTEREST RATE INCREASES INFLOW OF FOREIGN CAPITAL (TO EARN HIGH INTEREST INCOME) SUPPLY OF FOREIGN CURRENCY INCREASES RATE OF EXCHANGE OF RUPEE ↑
  23. 23. Learning Objective – 1 (Factors affecting Exchange Rate)• Peace & Security PEACE & SECURITY ATTRACTS FOREIGN CAPITAL SUPPLY OF FOREIGN CURRENCY INCREASES RATE OF EXCHANGE OF DOMESTIC CURRENCY ↑
  24. 24. Learning Objective – 1 (Factors affecting Exchange Rate)• Political Conditions POLITICAL STABILITY ATTRACTS FOREIGN CAPITAL SUPPLY OF FOREIGN CURRENCY INCREASES RATE OF EXCHANGE OF DOMESTIC CURRENCY ↑

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