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  Group Name: D

1. Welcome

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
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
1022114384
Md.Shazzad Hossain
6
1022114600
Shuvashis Sarkar

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: 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