The document discusses several theories of foreign exchange rate determination:
1. The mint parity theory ties exchange rates to the gold standard and the relative gold content of currencies.
2. The purchasing power parity theory states that exchange rates should equalize the purchasing power of currencies. Deviations create arbitrage incentives returning rates to parity.
3. The balance of payments theory views exchange rates as set by the demand and supply of foreign currency in a country's foreign exchange market based on its balance of payments position. Surpluses increase supply and push rates down while deficits decrease supply and push rates up.
A fantastic PPT on the foreign exchange rate. The PPT includes meaning and concept of foreign exchange and foreign exchange rate, the systems of determining foreign exchange rate, depreciation of domestic, appreciation of domestic currency, devaluation and revaluation of domestic currency. This PPT also explain the role of RBI in managing the exchange rate by using the concept of managed floating. Just download it and make your concepts stronger. Happy Learning !!
A fantastic PPT on the foreign exchange rate. The PPT includes meaning and concept of foreign exchange and foreign exchange rate, the systems of determining foreign exchange rate, depreciation of domestic, appreciation of domestic currency, devaluation and revaluation of domestic currency. This PPT also explain the role of RBI in managing the exchange rate by using the concept of managed floating. Just download it and make your concepts stronger. Happy Learning !!
The foreign exchange market or forex market as it is often called is the market in which currencies are traded.
Currency Trading is the world’s largest market consisting of almost trillion in daily volumes
The market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets.
There is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter.
This decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients.
The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency.
The first currency of a currency pair is called the “base currency,” while the second currency is called the counter currency. The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency.
Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market.
It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders.
Characteristics of foreign exchange
Its huge trading volume representing the largest asset class in the world leading to high liquidity;
Its geographical dispersion;
Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed income;
The use of leverage to enhance profit and loss margins and with respect to account size.
Determinants of exchange rates - International Business - Manu Melwin Joymanumelwin
International parity conditions: Relative purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
The foreign exchange market or forex market as it is often called is the market in which currencies are traded.
Currency Trading is the world’s largest market consisting of almost trillion in daily volumes
The market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets.
There is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter.
This decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients.
The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency.
The first currency of a currency pair is called the “base currency,” while the second currency is called the counter currency. The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency.
Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market.
It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders.
Characteristics of foreign exchange
Its huge trading volume representing the largest asset class in the world leading to high liquidity;
Its geographical dispersion;
Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed income;
The use of leverage to enhance profit and loss margins and with respect to account size.
Determinants of exchange rates - International Business - Manu Melwin Joymanumelwin
International parity conditions: Relative purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
Exchange Rate Theories – Derivatives – Forward Rate Agreements – Currency Futures and Interest Futures - International Banking – Role of IMF in International Liquidity – International Institutions – World Bank.
Basic of currency market for beginners currency evolution and Indian currency market. Traiding in Indian currency market Knowledge regarding currency market knowledge of currency market
International movements-meaning-Export & import of merchandise & services-International investment-International Payments, Rate of exchange, Economic integration
Similar to Foreign exchange rate determination (20)
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
We all have good and bad thoughts from time to time and situation to situation. We are bombarded daily with spiraling thoughts(both negative and positive) creating all-consuming feel , making us difficult to manage with associated suffering. Good thoughts are like our Mob Signal (Positive thought) amidst noise(negative thought) in the atmosphere. Negative thoughts like noise outweigh positive thoughts. These thoughts often create unwanted confusion, trouble, stress and frustration in our mind as well as chaos in our physical world. Negative thoughts are also known as “distorted thinking”.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
How to Create Map Views in the Odoo 17 ERPCeline George
The map views are useful for providing a geographical representation of data. They allow users to visualize and analyze the data in a more intuitive manner.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
The Art Pastor's Guide to Sabbath | Steve ThomasonSteve Thomason
What is the purpose of the Sabbath Law in the Torah. It is interesting to compare how the context of the law shifts from Exodus to Deuteronomy. Who gets to rest, and why?
CLASS 11 CBSE B.St Project AIDS TO TRADE - INSURANCE
Foreign exchange rate determination
1. FOREIGN EXCHANGE RATE DETERMINATION.
It is the rate at which one currency is exchanged for another. Or it is the
price of one currency in terms of another currency.
In a broader sense it means all those activities through which people make
payments for their transactions in different currencies prevailing in
different parts of the world.
In simple words, exchange rate is the exchange ratio of two currencies.
Eg., $1=Rs.15, it means that one dollar is exchanged for Rs.15.
Exchange rate is also known as external value of as currency.
External value means the number of goods and services that can be bought
with one unit of currency in another country.
2. DETERMINATION OF THE RATE OF EXCHANGE OR POLICIES OF FOREIGN
EXCHANGE RATE.
Three main policies:-
1. Mint Parity Theory.
The theory is associated with the working of the international gold
standard. Under this system the currency in use was made of gold or
was convertible into gold at a fixed rate. The value of currency unit was
defined in terms of certain weight of gold.
The rate at which the standard money of the country was convertible
into gold was called the mint price of gold. When the currencies of
different countries are defined in gold, the exchange rate between two
countries is automatically determined on a weight-to-weight basis of the
gold content of their currencies.
3. Now let us suppose that America and England are on gold standard, and
the British pound contained113.0016 grains of gold and the American
dollar contained 23.2200 grains of gold, then the exchange rate b/n the
British pound and American dollar will be equal to the ratio of the gold
content of two currencies. i.e.,
1pound=113.0016/23.2200=4.866dollars.
The exchange rate so fixed is subject to change. But this variation in
exchange rate is within the well-defined limits called gold points.
The gold points refer to the limits within which the market rate of
exchange b/n two countries of gold standard fluctuate from the mint
Parity equilibrium level. They are determined by the shipping costs from
one country to another which includes transportation packing ,
insurances etc.
The upper gold point is determined by adding the cost of shipping gold
to the mint parity exchange rate.
4. The lower gold point is obtained by deducting the cost of shipping gold
from the mint parity exchange rate.
For eg., if the mint parity rate of exchange for 1 pound =4.866 dollars
and the shipping charge is 2 cent per pound, then
the upper gold point is 1 pound=4.866+.02=4.886 dollars.
the lower gold point is 1 pound=4,866-.02=4.846 dollars.
The upper gold point is called the gold export point because it refers to
the critical rate of exchange at which gold will be exported.
The lower gold point is called gold import point because it indicates the
critical level of exchange below which gold will be imported.
Under the gold standard the exchange rate b/n two currencies will
remain within these two limits.
5.
6. Since the market exchange rate cannot rise above gold export point(OU)
or below the gold import point(OL),the dd and SS curves become
infinitely elastic at the gold points.
The cost of shipping gold determines the upper and lower limits beyond
which the exchange rate cannot move.
7. THE PURCHASING POWER PARITY THEORY.
The theory was put forward by Gustav Cassel to determine the exchange
rate b/n countries on inconvertible paper currencies.
The above theory states that the exchange rate is determined by the
equality of relative change in relative prices in the two countries.
There are two versions:-the absolute and the relative.
The absolute version states that the exchange rate b/n the two
currencies should b equal to the ratio of the price indices in the two
countries.
This version is not used much because it ignores transportation costs
and other factors which hinder trade.
Economists therefore use more the relative version to explain the
purchasing power parity theory.
8. It deals with the determination of the rate of exchange.
The rate of exchange should normally reflect the relationship b/n the
internal purchasing power of the various national currency units.
Eg., if an assortment of goods and services costs Rs. 1300 in India and if
the same costs $100 in the U.S.A., then the purchasing power of
Rs.1300= the purchasing power of$100 Or purchasing power of
Rs.13=Purchasing power of 1$.
This is the accepted exchange rate also known as equilibrium rat e and
if there is any deviation from this rate , the forces of equilibrium will
come into operation and again will restore the equilibrium rate of
exchange.
Now let us suppose that the price level in the two countries remains
the same but the exchange rate moves to $1=Rs.10.
9. It means that the purchasing power of Indian Re.in terms of dollar has
risen, and it is a case of overvaluation of the exchange rate.This will
encourage imports and discourage exports.
People who have surplus rupees will convert them into dollar and thus
earn a profit of Rs 3.
This will increase the dd for dollars in India but the supply of dollars will
decrease because the Indian exports to U.S.A. will fall.
Hence the Indian Re. in terms of dollar will fall until it reaches the
purchasing power parity exchange rate of $1=Rs13.
In the reverse case, if the exchange rate moves to Rs .16=1$, then the
Indian currency becomes undervalued.
10. THE BALANCE OF PAYMENT THEORY OR MODERN THEORY.
This theory is also called DD& SS. Theory.
It says that under free exchange rate, the exchange rate of a
currency depends on its BOPS.
A favourable BOPs raises the exchange rate while an
unfavourable one reduces the exchange rate.
The theory implies that the exchange rate is determined by the
DD.& SS. Of foreign exchange rate.
11. Regarding DD. the theory assumes that rate of exchange has no
influence on it because it is determined by other factors like
payment of international loans , interests thereon, foreign aid and
gifts etc.
SS. of foreign exchange has greater role . If the supply of foreign
exchange earned by a country is large,the value of exchange will
fall and vice-versa.
SS. of foreign exchange is determined by BOP which in turn
influences the determination of exchange rate.
12.
13. In the above diagrame OR is the equilibrium rate of exchange. If the
rate of exchange goes upto OR1, then the SS. Of foreign currency(ON)
will exceed its DD.(OM) . SS being more than DD, rate of exchange
will come down to OR. Contrary to this, if the rate of exchange comes
down to OR2 then the dd. for foreign currency (ON) will be more
than its supply(OM) DD. being more than SS.rate of exchange will rise
to Or. Hence the rate of exchange will be determined at a point
where DD. for and SS. Of foreign currency are equal