This document provides information about exchange rate determination. It begins with welcoming the audience and introducing the presenters. It then defines exchange rates and discusses their importance for international business. It describes the three main types of exchange rate systems - fixed, floating, and managed - and discusses their advantages and disadvantages. Finally, it outlines several theories for how exchange rates are determined, such as purchasing power parity theory and the balance of payments approach. It also lists some key determinants of exchange rates and discusses the impact of exchange rate fluctuations on multinational corporations' decisions.

1. Welcome
EXCHANGE RATE DETERMINATION

2. Premier University
[B.B.A]
International Financial Management
Presentation Subject
EXCHANGE RATE DETERMINATION
Submitted to
Lecturer:Ms.Nilufar Sultana
Department of Finance
Faculty of Business Administration
Premier University, Chittagong.
Semester: 8th Section: “A” Batch :22nd
Department : Finance
Group Name: D

3. Page 3
Presenters Profile
NO ID NAME
1 1022114412 Md. Ariful Islam Saimon Chowdhury
2 1022114372 Md.Shahadat Hossain
3 1021114362 Imteaj Ibna Hossain
4 1022114406 Md.Towky Uddin
5 1022114600 Shuvashis Sarkar
6 1022114384 Md.Shazzad Hossain

4. EXCHANGE RATE
DETERMINATION
Premier University

5. Foreign exchange Rate
 Exchange rate is the price of a currency in terms of other;
 Exchange rate determination is the most crucial decision
for international business;
 A good forecasting of exchange rate can increase the
company’s value by investing in profitable project;
 Exchange rate generally effect the future cash flow of an
organization;
 Exchange rate also reflect the condition of market of a
country;
Importance of determination exchange rate in
International business

6.  It is an Important decision for MNCs to predict the exchange rate;
whether it is appreciated or depreciated.
 Suppose it costs US citizen $1.99 to buy ₤1 in 2014 and one years
later it costs only $1.58 – dollar has appreciated
 Suppose it costs US citizen $1.99 to buy ₤1 GBP in 2014 and one
years later it costs only $2.01 – dollar has Depreciated.
Foreign Exchange Rate

7.  Different countries have different currencies with different values….
 Example: Bangladesh -Taka
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 NEEDED???.....

8.  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
WHY IT NEEDED???.....

9.  Also called “FOREX” market.
 It is the place were foreign moneys were bought and sold.
 It involves the buying of one currency and selling of another
currency simultaneously.
 Exchange rates are determined here….
 Has no geographical boundaries…..
FOREIGN EXCHANGE MARKET

10.  It is the rate at which one currency will be exchanged for another in
foreign exchange.
 It is also regarded as the value of one country’s currency in terms of
another currency.
There are three basic types;
Fixed rate
Floating rate
Managed rate
FOREIGN EXCHANGE RATE

11.  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.
FIXED EXCHANGE RATE

12. Advantages
 It provide the stability of exchange rate.
 Fixed rates provide greater certainty for exporters and importers.
Disadvantages
 Too rigid to take care of major upheavals.
 Need large reserves to defend the fixed exchange rate.
 May cause destabilizing speculations; most currency crisis took
place under a fixed exchange system.
Advantages & Disadvantages

13. • 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)
FLOATING/FLEXIBLE EXCHANGE RATE

14. Advantages
 Automatic adjustment for countries with a large balance of payments
deficit.
 Flexibility in determining interest rates
 Allow countries to maintain independent economic policies.
 Permit a smooth adjustment to external shocks.
 Don't need to maintain large international reserves.
Disadvantages
 Flexible exchange rates are highly unstable so that flows of foreign
trade and investment may be discouraged.
 They are inherently inflationary.
Advantages & Disadvantages

15.  Managed exchange rate systems permit the government to place
some influence on an exchange rate that would otherwise be freely
floating.
 Managed means the exchange rate system has attributes of both
systems.
 Through such official interventions it is possible to manage both
fixed and floating exchange rates.
MANAGED EXCHANGE RATE

16. • As stated earlier exchange rate is determined by its the forces of
supply and demand.
• Therefore, if for some reason people increase their demand for a
specific currency, then the price will rise provided that the supply
remains stable.
• On the contrary, if the supply is increased the price will decline and
it is provided that the demand remains stable.
Simple Mechanism of Demand & Supply

17. Simple Mechanism of Demand & Supply

18.  Most widely accepted theory
 “According to PPP theory, when exchange rates are of a
fluctuating nature, the rate of exchange between two currencies in
the long run will be fixed by their respective purchasing powers in
their own nations.”
 i.e the price of a good that is charged in one country should be
equal to the one charged for the same good in another country,
being exchanged at the current rate.
 This rule is also known as the law of one price.
 It is an economic theory that estimates the amount of
adjustment needed on the exchange rate between countries in
order for the exchange to be equivalent to each
currency's purchasing power.
Purchasing Power Parity Theory (PPP
Theory)

19.  The balance of payments approach is another method that explains
what the factors are that determine the supply and demand curves
of a country’s currency.
 As it is known from macroeconomics, the balance of payments is a
method of recording all the international monetary transactions of a
country during a specific period of time.
 The transactions recorded are divided into four categories: the
current account transactions, the capital account transactions,
financial account and the central bank transaction.
The Balance of Payment Theory

20. CURRENT ACCOUNT
export and import of goods &services
CAPITAL ACCOUNT
Capital transfers
FINANCIAL TRANSFERS
Foreign direct investment
Portfolio investment
RESERVEBANK TRANSACTIONS

21. • According to the theory, a deficit in the balance of payments leads to
fall or depreciation in the rate of exchange, while a surplus in the
balance of payments strengthens the foreign exchange reserves,
causing an appreciation in the price of home currency in terms of
foreign currency. A deficit balance of payments of a country implies
that demand for foreign exchange is exceeding its supply.
• As a result, the price of foreign money in terms of domestic currency
must rise, i.e., the exchange rate of domestic currency must fall. On
the other hand, a surplus in the balance of payments of the country
implies a greater demand for home currency in a foreign country
than the available supply. As a result, the price of home currency in
terms of foreign money rises, i.e., the rate of exchange improves.

22. 1. Interest Rate
Whenever there is an increase interest rates in domestic
market there will be increase investment funds causing a
decrease in demand for foreign currency and an increase in
supply of foreign currency.
2. Inflation Rate
when inflation increases there will be less demand for
local goods (decreased supply of foreign currency) and more
demand for foreign goods (increased demand for foreign
currency).
DETERMINANTS OF FOREIGN EXCHANGE
RATE

23. 3. Government budget deficit or surplus
The market usually react negatively to widening govt. budget deficits
and positively to narrowing budget deficits. This will result in change
in the value of countries currency.
4. Political conditions
Internal, regional and international political conditions and events
can have a profound effect on currency market
DETERMINANTS OF FOREIGN EXCHANGE
RATE

24. • Advantages of a strong currency
– Makes imported raw materials cheaper
– Helps to control inflation
– Leads to lower interest rates
– Makes foreign assets cheaper
• Disadvantages of a strong currency
– Exporters lose price competitiveness
– Adverse impact on competitiveness may be
moderated if leads to lower wage demands
Impact of exchange rate on firms

25. MNC
Hedging
decision
Short term
financing
decision
Short term
investment
decision
Capital
budgeting
Decision
Earnings
assessment
Long term
financing
Decision
Importance of exchange rate determination
for MNC’s