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EXCHANGE RATE
Foreign exchange rate, forex rate or fx rate The price of one currency in terms of another currency (say Euros per dollar or rupees per dollar)is called the exchange rate. It is regarded as the value of one countrys currency in terms of another countrys currency.
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An exchange rate can operate under the following types of exchange rate systems; Floating exchange rate Managed floating exchange rate Fixed exchange rate Semi fixed exchange rate Spot exchange rate Forward exchange rate
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Forex market is not dominated by single market but it is combination of global network of computers and brokers around the world. Central banks use their massive buying and selling capabilities to alter the exchnage rates through their open market activities. Forex brokers also act as market makers, and may post bid and ask prices for currency pair that differs from the most competitive bid in the market.
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Exchange Control:
Govt. control imposed to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased by the resident or non-residents respectively. Common exchange controls include: Banning the use of foreign currency. Restricting the amount of currency that can be exchanged (imported or exported) within the country. Banning locals from possessing foreign currency.
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Restricting currency exchange to govt.approved exchangers. Fixed exchange rate. Countries with forex exchange controls are also known as Article 14 countries after provisions in IMF agreement allowing exchange control for transitional economies. It allows greater degree of economic stability by limiting the amount of exchange rate volatility due to currency inflows/outflows.
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Imports
Productivity:
In long run, as a country becomes more productive relative to other countries, its currency appreciates. Mathematical representation: Productivity domestic demand for goods prices domestic goods Domestic currency will be appreciated.
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Expected Production:
In short run, increase in production is expected by a country, it will have more goods not only to satisfy the domestic needs of its country but also for the export purpose that will cause appreciation in domestic currency. Mathematical representation: Expected expected domestic Production export level goods demand Domestic currency will be appreciated.
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