Académique Documents
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Rates
Methods of quoting exchange rates
Direct Method
Indirect method
Base currency
Currency which is being bought and
sold
Us $ 1 =Rs. 45.2525-2575
Difference is known as spread
Conventionally first rate quoted in full
and second, only last two digits
1
Factors affecting
exchange rates
Balance of payments
Balance of trade Difference between import and
export of goods
Balance 0n Current account Add difference on
account of Receipts and payments from Tourism,
Banking and Insurance, etc.
Balance on Capital Account Add Receipts and
payments on account of Aid, Grants, Foreign
Investment etc.
Factors continued
Strength of Economy
Long run growth may lead to better balance of trade so
domestic currency will appreciate
But in short run, imports will be higher, hence demand
for foreign currency will be higher and will lewad to
foreign currency appreciation
Indicators
Industrial Production
Capacity utilisation
Rate of growth in GDP, GNP
Unemployment, inflation etc.
Fiscal Policy
will affect growth and thus exchange rates
Expansionary leads to growth, better balance of trade
etc.
Interest rates
make capital move from one country to another and
thus affect demand and supply and thus exchange
rates
If domestic rates increase, more demand from foreign
investors who will supply more foreign currency and
thus foreign currency depreciates
Investors are affected not only by nominal interest
rates but also by exchange fluctuations. They use the
real interest rates i.e. Nominal interest minus expected
depreciation while making investment decisions.
Factors continued
Monetary Policy
Affects inflation, growth, interest
rates and thus exchange rates
Political factors
Exchange Control
Central Bank intervention
Speculation
Technical factors
Expectations of Forex Markets