CLASS 12 CBSE FOREIGN EXCHANGE PPT BY CHARU KOHLI

1. Foreign Exchange refers to all currencies other than the
domestic currency of a given country.
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3. Foreign Exchange Rate is defined as the
price of the domestic currency with respect
to another currency. The purpose of foreign
exchange is to compare one currency with
another for showing their relative values.
Foreign exchange rate can also be said to be
the rate at which one currency is exchanged
with another or it can be said as the price of
one currency that is stated in terms of
another currency.
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9. 1. Fixed Exchange Rate
•Under this system, the exchange rate for the currency is fixed by the
government. Thus, the government is responsible to maintain the stability
of the exchange rate. Each country maintains the value of its currency in
terms of some ‘external standard’ like gold, silver, another precious metal,
or another country’s currency.
•The main purpose of a fixed exchange rate is to maintain stability in the
country’s foreign trade and capital flows.
•The central bank or government purchases foreign exchange when the rate
of foreign currency rises and sells foreign exchange when the rates fall to
maintain the stability of the exchange rate.
•Thus, government has to maintain large reserves of foreign currencies to
maintain a fixed exchange rate.
•When the value of one currency(domestic) is tied to another currency then
this process is known as pegging and that’s why the fixed exchange rate
system is also referred to as the Pegged Exchange Rate System.
•When the value of one currency(domestic) is fixed in terms of another
currency or in terms of gold, then it is called the Parity Value of currency.
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10. 3. Managed Floating Exchange Rate
•It is the combination of the fixed rate system (the managed part) and
the flexible rate system (the floating part), thus, it is also called
a Hybrid System. It refers to the system in which the foreign exchange
rate is determined by the market forces and the central bank
stabilizes the exchange rate in case of appreciation or depreciation of
the domestic currency.
•Under this system, the central bank acts as a bulk buyer or seller of
foreign exchange to control the fluctuation in the exchange rate. The
central bank sells foreign exchange when the exchange rate is high to
bring it down and vice versa. It is done for the protection of the
interest of importers and exporters.
•For this purpose, the central bank maintains the reserves of foreign
exchange so that the exchange rate stays within a targeted value.
•If a country manipulates the exchange rate by not following the rules
and regulations, then it is known as Dirty Floating.
•However, the central bank follows the necessary rules and
regulations to influence the exchange rate.
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11. 2. Flexible Exchange Rate System
•Under this system, the exchange rate for the currency is fixed by
the forces of demand and supply of different currencies in the
foreign exchange market. This system is also called the Floating
Rate of Exchange or Free Exchange Rate. It is so because it is
determined by the free play of supply and demand forces in the
international money market.
•Under the Flexible Exchange Rate system, there is no intervention
by the government.
•It is called flexible because the rate changes with the change in the
market forces.
•The exchange rate is determined through interactions of banks,
firms, and other institutions that want to buy and sell foreign
exchange in the foreign exchange market.
•The rate at which the demand for foreign currency is equal to its
supply is called the Par Rate of Exchange, Normal
Rate, or Equilibrium Rate of Foreign Exchange.
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12. Basis Devaluation Depreciation
Meaning
Devaluation includes
reduction in the
value of domestic
currency in terms of
foreign currencies by
the government
under a fixed
exchange rate
system.
Depreciation refers to
the decrease in
the value of domestic
currency in terms of
foreign currencies by
the government
under a flexible
exchange rate
system.
Exchange Rate
System
Fixed exchange rate
system.
Flexible exchange
rate system.
Occurrence
It occurs due to the
government.
It occurs due to
market forces of
demand
and supply.
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