Export
Import
Foreign exchange rate
Measure
1 unit foreign currency = ?? No. of units domestic currency
1 Dollar = 70 rupees
FER refers to the rate which measures how many units of domestic currency is
required to exchange with 1 unit of foreign currency.
How Foreign exchange rate is Determine ???
Country use different methods to determine the FER 1950
1970
1991
FIXED EXCHANGE SYSTEM FLEXIBLE EXCHANGE SYSTEM MIXED EXCHANGE SYSTEM
FER DETERMINE BY FER DETERMINE BY
MARKET FORCES
FER DETERMINE BY MARKET FORCES
i.e. DEMAND & SUPPLY
GOVERNMENT i.e. DEMAND & SUPPLY
Or govt. authorities But
( RBI) FER ( INC.)
A) D S 1 DOLLAR = 90 RUPEE
FER ( DEC)
70
1 DOLLAR = 50 RUPEES
B) rupees
Then, GOVT. WILL
INTERVENE
To STABILIZE FER
1 dollar
HOW FER IS DETERMINED IN THE FIXED EXCHANGE SYSTEM
GOVT.
DETERMINED
BASIS = ??
GOLD RESERVE
1 ) GOLD STANDARD METHOD
1000 gm
NO. OF UNITS 100
CURRENCY
1 dollar = 10 gm gold
1 rupee = 5 gm gold
1 dollar = 2 rupee
DEPRICIATION OF DOMESTIC CURRENCY DEVALUATION OF DOMESTIC CURRENCY
(DECLINE
VALUE)
DECLINE
DOLLAR RUPEE
1 DOLLAR = 70 RUPEES
VALUE ( V inc) ( V dec)
1 DOLLAR = 80 RUPEES
DOMESTIC CURRENCY
FER
TERMS
FOREIGN CURRENCY
MARKET FORCES BY GOVERNMENT
i.e. demand & supply OR
GOVT AUTHORITY
Dollar Dollar
(Dem) (supply)
APPRECIATION OF DOMESTIC CURRENCY REVALUATION OF DOMESTIC CURRENCY
VALUE
INCREASE
DOLLAR RUPEE
1 DOLLAR = 70 RUPEE INCREASE VALUE VALUE
1 DOLLAR = 60 RUPEE VALUE
DOMESTIC CURRENCY
TERMS FER
FOREIGN CURRENCY
MARKET FORCES BY GOVERNMENT
OR
DEMAND AND SUPPLY GOVT. AUTHORITIES
DEMAND SUPPLY
DOLLAR DOLLAR
(3 marks)
What will be the impact on export / import of
depreciation / devaluation of domestic currency ?
1 dollar = 70 rupee
1 dollar = 80 rupee
Domestic goods Foreign goods
Cheaper Expensive
Demand ( inc) Demand ( dec )
Export ( inc) Imports ( dec )
(3 marks)
What will be the impact on export/import of
appreciation / re-valuation of domestic currency
1 dollar = 70 rupee
1 dollar = 60 rupee
Domestic goods Foreign goods
expensive Cheaper
Demand ( dec ) Demand ( inc)
Export ( dec ) Imports ( inc)
What are the sources of demand of foreign exchange??
1) Import
2) medical treatment to abroad
3) tourism to abroad
4) education to abroad
5) Investment in abroad FDI / FII
6) Speculation
What are the sources of supply of foreign exchange??
1) Export g/s
2) medical treatment from abroad in india
3) tourism from abroad in india
4) education from abroad in india
5) Investment from abroad FDI / FII in india
LET US CONSIDER DD & SS ARE THE DEMAND AND SUPPLY CURVE
OF FOREIGN EXCHANGE RESPECTIVELY.
AT POINT E , MARKET DEMAND & SUPPLY ARE EQUAL.
OF IS THE INNITIAL FER .
WHAT WILL BE THE IMPACT ON FER , WHEN DEMAND OF FOREIGN
EXCHANGE WILL INCREASES ? EXPLAIN WITH THE HELP OF DIAGRAM.
WHEN THE DEMAND OF FOREIGN EXCHANGE INCREASES , THIS WILL
SHIFT THE DEMAND CURVE TOWARDS RIGHT FROM DD TO D’D’.
THIS WILL CREATE EXCESS DEMAND WHICH WILL LEADS TO RISE IN FER
FROM OF TO OF’.
D’
D S
E’ DEPRECIATION
80
OF DOMESTIC
70 E F CURRENCY
RUPEES
1 DOLLAR
WHAT WILL BE THE IMPACT ON FER , WHEN SUPPLY OF FOREIGN
EXCHANGE WILL DECREASES? EXPLAIN WITH THE HELP OF DIAGRAM.
WHEN THERE IS A DECREASE IN THE SUPPLY OF FOREIGN EXCHANGE , THIS WILL SHIFT
THE SUPPLY CURVE TOWARDS LEFT FROM SS TO S’S’.
THIS WILL CREATE EXCESS DEMAND i.e. EF.
THIS WILL LEADS TO RISE IN FER FROM OF TO OF’
S’
D S
E’
1 DOLLAR = 70 RUPEES
80
70 F E 1 DOLLAR = 80 RUPEE
RUPEES
DEPRECIATION
OF DOMESTIC
CURRENCY
1 DOLLAR
WHAT WILL BE THE IMPACT ON FER WHEN THE DEMAND OF FOREIGN EXCHANGE
WILL DECREASES.
EXPLAIN WITH THE HELP OF DIAGRAM.
D S
D’
EXCESS SUPPLY 70 F
E
i.e. EF
60
E'
P ( Dec)
1 DOLLAR = 70
1 DOLLAR = 60
S
S’
FER ( DEC)
70 E
E’
60
NOMINAL EXCHANGE RATE REAL EXCHANGE RATE
1 DOLLAR = 70 RUPEES IT MEASURES THE RELATIVE PRICE
VALUE OF DOMESTIC GOODS IN
1 RUPEE = 1 / 70 DOLLAR TERM OF FOREIGN GOODS .
IT REFERS TO THE RATE WHICH 1 TV USA = 3 TV INDIA
MEASURES THE VALUE OF DOMESTIC
CURRENCY IN TERMS OF FOREIGN 1 TV INDIA = 1/3 TV USA
CURRENCY
1 TV INDIA = 1 TV USA
1 DOLLAR = 1 RUPEE
PURCHASING POWER PARITY
PEGGING
(PPP)
TYPES OF FOREIGN EXCHANGE MARKET
SPOT MARKET FORWARD MARKET
20/ JUNE DEAL
20 / JUNE DEAL
1 DOLLAR = 70 RUPEE
1 DOLLAR = 70 RUPEES
PAYMENT
ON THE
SPOT
20 / DEC G/S
PAYMENT BASIS 20 / JUNE
1 DOLLAR = 80 RUPEE
FUNCTIONS OF FOREIGN EXCHANGE MARKET
1 ) HEDGING FUNCTION
20/JUNE /20 DEAL 1 DOLLAR = 70 RUPEE
AGRREMENT
20/ DEC /20 G/S PURCHASE 1 DOLLAR = 80 RUPEE
1 DOLLAR = 60 RUPEE
PAYMENT
BASIS
20/ JUNE / 20 RATE
i.e. 1 DOLLAR = 70 RUPEES
HELP REDUCE RISK OF FLUCTION
CREDIT FUNCTION
TRANSFER FUNCTION
