Foreign Exchange Rate

 "Dear friends,Hope you are doing well!!Today post is on( Foreign Exchange Rate)  which is a part macro-economics ,I hope it will benefit you a lot in studying.       

 Chapter 2:  Foreign Exchange Rate

Foreign exchange: A currency other than home currency called foreign exchange.

Foreign exchange rate: The rate at which one currency is exchange for anther is called rate of exchange n other word.In other words the rate of exchange is the price of one currency  stated in items of another currency for eg :1 US $ exchanging for 50 Indian rupees then the rate of exchange is 1$=Rs 50 or 1 Rs=1/50=0.02$.

Foreign exchange market: It refers to the market where the national currencies of different countries are traded for one onther .It mainly performs fallowing 3 functions .

•  Transfer of purchasing power between the country it is called transfer function
•  It provides credit channels for foreign trade it is also called credit function
•  It protects against foreign exchange risk it is also called hedging function

The reasons for the demand foreign exchange: 

The demand for foreign exchange arises because of the following  reasons

• For making payment of imports of goods and services
• For making investment and lending abroad by the domestic
• For outward unilateral transfer like sending gift to other country

The sources of supply of foreign exchange:

• Foreigner purchasing home currency goods & services through exports
• Foreigner investment in home country  through joint ventures & through financial market occupation.
• Inward unilateral transfer such as receiving of a gift from abroad.
• Foreign currency flow into the economy due to currency dealers 

Depreciation of currency: 

Depreciation of a currency implies a fall in the external value of the currency when the domestic currency exchange for wiser units of a foreign currency the domestic currency is said to have depreciated

for eg: If a given exchange rate  is 1$= rs 60.Now a demand for $ inc in the Indian market as a result 

now  sets that $ 1=Rs 62.This mean now 62 Rs instead for Rs 60 are needed to purchase 1$.We will mean rupee has depreciated in value .

Appreciated of a currency:

Appreciated of a currency  implies a rise in the external value of the currency when the domestic currency exchange for lesser units of a foreign currency the domestic currency is said to have appreciated.

for eg: If a given exchange rate  is 1$= rs 60.Now a demand for $ decreases in the Indian market as a result  now foreign exchange  sets that $ 1=Rs 58.This mean now 60 $ instead for Rs 60 are needed to purchase 1$.We will mean rupee has depreciated in value .

Difference between fixed exchange rate and flexible exchange rate

MERITS AND DEMERITS OF FIXED EXCHANGE RATE

Merits of fixed exchange rate:

• Promotes international trade
• promote investment 
• no fear of speculation

Demerits of fixed exchange rate:

• Large number of foreign currency
• sacrifice of the objective of full employment and stable prices

MERITS AND DEMERITS OF FLEXIBLE EXCHANGE RATE

Merits of flexible exchange rate:

• Simple in operations
• Autonomy of domestic monetary policy
• No need of foreign exchange resources

Demerits of flexible exchange rate:

• Unstable conditions
• Inflationary based
• Widespread speculation

Spot Rate:

It is the rate at which foreign exchange is made available on the spot .This is also known as cable rate

& telegraphic transfer rate

The Equilibrium in the foreign exchange market:

In foreign exchange market like any normal market contains a downward slopping  demand curve and upward slopping supply curve.The intersection of the demand curve and supply curve  determines the equilibrium in the exchange rate and the equilibrium  quantity of foreign currency .It shown in the following diagram

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