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Understanding Foreign Exchange Rates

The document discusses foreign exchange and exchange rates. It defines foreign exchange as foreign currencies like dollars, euros, and yen, and exchange rates as the price of one currency in terms of another. Exchange rates can be fixed or floating, direct or indirect, buying or selling, and spot or forward. Fixed rates are set by governments while floating rates are determined by supply and demand. Direct rates quote the local currency cost of a foreign currency unit, while indirect rates quote foreign currency per local currency unit. Spot rates provide immediate delivery, while forward rates are for future contracted delivery. Exchange rates allow currencies to be converted between countries.

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Adarsh Shah
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5 views9 pages

Understanding Foreign Exchange Rates

The document discusses foreign exchange and exchange rates. It defines foreign exchange as foreign currencies like dollars, euros, and yen, and exchange rates as the price of one currency in terms of another. Exchange rates can be fixed or floating, direct or indirect, buying or selling, and spot or forward. Fixed rates are set by governments while floating rates are determined by supply and demand. Direct rates quote the local currency cost of a foreign currency unit, while indirect rates quote foreign currency per local currency unit. Spot rates provide immediate delivery, while forward rates are for future contracted delivery. Exchange rates allow currencies to be converted between countries.

Uploaded by

Adarsh Shah
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INSTITUTE OF BUSINESS MANAGEMENT AND

RESEARCH
IPS ACADEMY, INDORE

FOREIGN EXCHANGE AND EXCHANGE RATES

SUBMITTED TO: SUBMITTED BY:


DR. VIVEK SINGH KUSHWAH VRATIKA PATIDAR
FOREIGN EXCHANGE
FOREIGN EXCHANGE GENERALLY REFERS TO FOREIGN
CURRENCY, EG DOLLAR, EURO, YEN ETC., THE OTHER PART OF
FOREIGN EXCHANGE WHICH IS EXCHANGE RATES, WHICH IS THE
PRICE OF ONE CURRENCY IN TERMS OF THE OTHER CURRENCY.

ACCORDING TO HARTLY WITHERS,


“FOREIGN EXCHANGE IS THE ART AND SCIENCE OF
INTERNATIONAL MONETARY EXCHANGE”
NATURE OF FOREIGN EXCHANGE

• AFFECTED BY DEMAND AND SUPPLY.


• IT CAN BE QUOTED DIRECTLY AND INDIRECTLY.
• AFFECTED BY THE FISCAL POLICY OF THE
GOVERNMENT.
• AFFECTED BY POLITICAL CONDITION OF THE
COUNTRY.
EXCHANGE RATE

ACCORDING TO HAINES,
“EXCHANGE RATE IS THE PRICE OF THE CURRENCY CAN BE
EXCHANGED FOR THE NUMBER OF UNITS OF CURRENCY OF ANOTHER
COUNTRY.”
EXCHANGE RATE IS THAT RATE AT WHICH ONE UNIT OF CURRENCY OF A
COUNTRY CAN BE EXCHANGED FOR THE NUMBER OF UNITS OF CURRENCY
OF ANOTHER COUNTRY.
IT’S THE PRICE FOR WHICH ONE CURRENCY IS EXCHANGED FOR ANOTHER.
TYPES OF EXCHANGE RATES:

1. FIXED AND FLOATING EXCHANGE RATES:


FIXED EXCHANGE RATE IS THE OFFICIAL RATE SET BY THE
MONETARY AUTHORITIES OF THE GOVERNMENT FOR ONE OR
MORE CURRENCIES.
UNDER FLOATING EXCHANGE RATE, THE VALUE OF THE
CURRENCY IS DECIDED BY SUPPLY AND DEMAND FACTORS.
2. DIRECT AND INDIRECT EXCHANGE RATES:
DIRECT METHOD, A GIVEN NUMBER OF UNITS OF LOCAL
CURRENCY PER UNIT OF FOREIGN CURRENCY IS QUOTED. THEY
ARE DESIGNATED AS DIRECT/CERTAIN RATES BECAUSE THE
RUPEE COST OF SINGLE FOREIGN CURRENCY UNIT CAN BE
OBTAINED DIRECTLY. DIRECTLY QUOTATION IS ALSO CALLED
HOME CURRENCY QUOTATION
INDIRECT METHOD, A GIVEN NUMBER OF UNITS OF FOREIGN
CURRENCY PER UNIT OF LOCAL CURRENCY IS QUOTED. INDIRECT
QUOTATION IS ALSO CALLED FOREIGN CURRENCY QUOTATION.
3. BUYING AND SELLING:
AS FOREIGN MARKET IS VERY LUCRATIVE AND COMPETITIVE
MARKET, THE PARTIES ENGAGED IN THIS BUSINESS, NATURALLY
DESIRE TO EARN MAXIMUM PROFIT. THE DEALERS WILL QUOTE
THE RATES OF FOREIGN CURRENCIES IN TWO WAYS. THEY WILL
GIVE LOW RATE WHEN THEY WILL BUY FOREIGN CURRENCY AND
CHANGE HIGH RATES IN CASE OF SALE OF FOREIGN EXCHANGE.
4. SPOT AND FORWARD:
SPOT RATE REFERS TO THAT RATE OF EXCHANGE AT WHICH THE DELIVERY OF
FOREIGN EXCHANGE IS MADE TO THE BUYER BY THE SELLER AT THE SPOT OR
DELIVERY OF CURRENCY BOUGHT OR SOLD IS IMMEDIATE.
FORWARD RATE REFERS ARE THOSE QUOTED FOR FORWARD OR FUTURE
DELIVERY IS AFFECTED AT CONTACTED FUTURE DATE AT THIS RATE
CONCLUSION
FOREIGN EXCHANGE IS THE MECHANISM BY WHICH THE
CURRENCY OF ONE COUNTRY GETS CONVERTED INTO THE
CURRENCY OF ANOTHER COUNTRY.
FOREIGN EXCHANGE RATE REFERS TO THE RATE AT WHICH THE
CURRENCY OF ONE COUNTRY IS CONVERTED INTO THE
CURRENCY OF ANOTHER COUNTRY, AND IT HAS VARIOUS KINDS,
NAMELY, FIXED AND FLOATING, DIRECT AND INDIRECT, BUYING
AND SELLING, SPOT AND FORWARD ETC.

THANK YOU!

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