Chapter 11 Foreign Exchange Rate
Foreign Exchange/ Foreign Currency
Meaning: It refers to the currency other than our domestic currency.
Foreign Exchange Rate
Meaning: Rate at which currency is exchange with the currency of other country.
Foreign Exchange Market
Meaning: It refers to a market in which foreign currency are bought and sold.
Functions of foreign exchange market
1. Transfer function: Transferring the purchasing power between the countries.
2. Credit Function: It provides credit for foreign exchange/ trade.
3. Hedging function: Protecting the interest of investor & minimizing his risk of foreign exchange market.
Two types of foreign exchange Rate systems
1. Fixed exchange rate system
2. Flexible/ Floating exchange rate system
1. It leads to market stability.
2. It also prevents speculation in the market.
Demerits
1. Govt. will have to maintain.
2. venture capitalists would not like to invest.
2. Flexible Exchange Rate System
Meaning: It refers to the system in which exchange rate for foreign exchange is determined by the market force of demand and supply.
1. Govt. is under no obligation maintain reserves.
2. Venture capitalists would like to invest.
Demerits
1. Leads to fluctuation in market.
2. Speculation is prevalent.
Demand For Foreign Exchange
1. To purchase goods & services abroad.
2. To purchase land, building etc abroad.
3. To invest in financial assets like shares, debentures of foreign companies.
4. To travel abroad.
5. To send gifts & grants abroad.
Sources of supply of foreign
1. When foreigners purchase goods & services from India.
2. When foreigners purchase assets like land, building, machinery etc. in India.
3. When foreigners purchase financial assets like shares in India.
4. When foreigners travel to India.
Currency Depreciation And Currency Appreciation
Currency Depreciation: It refers to decrease in value of domestic currency in terms of foreign currency.
Currency Appreciation: It refers to increase in the value of domestic currency in terms of foreign currency.
Difference Between Depreciation And Devaluation of currency
Difference between Appreciation of currency And Revaluation of currency
Foreign Exchange/ Foreign Currency
Meaning: It refers to the currency other than our domestic currency.
Foreign Exchange Rate
Meaning: Rate at which currency is exchange with the currency of other country.
Foreign Exchange Market
Meaning: It refers to a market in which foreign currency are bought and sold.
Functions of foreign exchange market
1. Transfer function: Transferring the purchasing power between the countries.
2. Credit Function: It provides credit for foreign exchange/ trade.
3. Hedging function: Protecting the interest of investor & minimizing his risk of foreign exchange market.
Two types of foreign exchange Rate systems
1. Fixed exchange rate system
2. Flexible/ Floating exchange rate system
1. Fixed exchange rate system
Meaning: It refers to the system in which exchange rate for currency is fixed by the govt.
Meaning: It refers to the system in which exchange rate for currency is fixed by the govt.
- Revaluation of a currency: Increase in the value of our domestic currency under fixed exchange rate system.
- Devaluation of a currency: Decrease in the value of our currency under fixed exchange rate system.
1. It leads to market stability.
2. It also prevents speculation in the market.
Demerits
1. Govt. will have to maintain.
2. venture capitalists would not like to invest.
2. Flexible Exchange Rate System
Meaning: It refers to the system in which exchange rate for foreign exchange is determined by the market force of demand and supply.
- Appreciation of a currency: Increase in the value of our currency because of market forces of DD & SS.
- Depreciation of a currency: Decrease in the value of our currency because of market forces of DD & SS.
1. Govt. is under no obligation maintain reserves.
2. Venture capitalists would like to invest.
Demerits
1. Leads to fluctuation in market.
2. Speculation is prevalent.
Demand For Foreign Exchange
1. To purchase goods & services abroad.
2. To purchase land, building etc abroad.
3. To invest in financial assets like shares, debentures of foreign companies.
4. To travel abroad.
5. To send gifts & grants abroad.
Sources of supply of foreign
1. When foreigners purchase goods & services from India.
2. When foreigners purchase assets like land, building, machinery etc. in India.
3. When foreigners purchase financial assets like shares in India.
4. When foreigners travel to India.
Currency Depreciation And Currency Appreciation
Currency Depreciation: It refers to decrease in value of domestic currency in terms of foreign currency.
Currency Appreciation: It refers to increase in the value of domestic currency in terms of foreign currency.
Difference Between Depreciation And Devaluation of currency
Difference between Appreciation of currency And Revaluation of currency
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