Post on 24-Dec-2014
description
Introduction to Currency Markets
Learning Objectives
To Understand• Foreign Exchange & Foreign Exchange Rate• Foreign Exchange Market
Learning Objective – 1 (Meaning of Foreign Exchange Rate)
Exchange rate is the price of a country’s currencyin terms of another country’s currency.
Learning Objective – 1 (Determination of Exchange Rate)
• Gold Standard System • Introduced in the year 1875• Currency was backed by gold• The difference in price of an
ounce of gold between two currencies became the exchange rate for those currencies.
• Eventually broke down during the beginning of world war I.
Learning Objective – 1 (Determination of Exchange Rate)
• Bretton Wood System • Representatives of different countries, in July 1944 met at Bretton Woods, New Hampshire, USA
Learning Objective – 1 (Determination of Exchange Rate)
• Bretton Wood System • A method of fixed exchange rates.
• The us dollar replacing the gold standard to become a primary reserve currency.
• The US dollar became the only currency that would be backed by gold.
Learning Objective – 1 (Determination of Exchange Rate)
• Bretton Wood System • The creation of three international agencies to oversee economic activity: IMF, IBRD & GATT
• 1971 marked the end of Bretton Wood System.
Learning Objective – 1 (Determination of Exchange Rate)
• Exchange Rate System after Bretton Woods
• Dollarization• Fixed exchange rate • Floating exchange rate
Learning Objective – 1 (Determination of Exchange Rate)
• Exchange Rate System after Bretton Woods
Dollarization
Use of foreign currency in parallel to or instead of
domestic currency
Learning Objective – 1 (Determination of Exchange Rate)
• Exchange Rate System after Bretton Woods
Fixed Exchange Rate
The value of a currency is determined by
the government
Learning Objective – 1 (Determination of Exchange Rate)
• Exchange Rate System after Bretton Woods
Floating Exchange Rate
The value of a currency is determined by
demand for and supply of foreign exchange
Learning Objective – 1 (Factors affecting Exchange Rate)
• Trade Movement• Capital Flow• Granting of Loans• Sale and Purchase of
Securities• Speculation• Protection
• Control of Foreign Exchange• Inflation• Financial Policy• Bank Rate• Peace & Security• Political Conditions
Learning Objective – 1 (Factors affecting Exchange Rate)
• Trade Movement IfImport > Export => Depreciation in the
value of the currency
Import < Export => Appreciation in the value of the currency
Learning Objective – 1 (Factors affecting Exchange Rate)
• Capital Flow When A capital INFLOW take place there is an appreciation in the value of the currency.
When A capital OUTFLOW take place there is a depreciation in the value of the currency.
Learning Objective – 1 (Factors affecting Exchange Rate)
• Granting of Loans
Receiving of loans from a foreign country appreciates the value of the currency
Learning Objective – 1 (Factors affecting Exchange Rate)
• Sale and Purchase of Foreign Securities Sale of foreign securities by a country
appreciates the value of the currency.
Purchase of foreign securities by a country depreciates the value of the currency
Learning Objective – 1 (Factors affecting Exchange Rate)
• Speculation (SAY) SPECULATORS EXPECT VALUE OF DOLLAR ↑
Þ PURCHASE DOLLARS TO EARN PROFIT IN FUTURE
Þ DEMAND FOR DOLLAR INCREASES
Þ RATE OF EXCHANGE OF RUPEE ↓(IN TERMS OF US DOLLAR)
Learning Objective – 1 (Factors affecting Exchange Rate)
• Protection PROTECTION DISCOURAGES IMPORTS
Þ DEMAND FOR FOREIGN CURRENCY DECREASES
Þ RATE OF EXCHANGE OF RUPEE ↑(IN TERMS OF US DOLLAR)
Learning Objective – 1 (Factors affecting Exchange Rate)
• Exchange Control EXCHANGE CONTROL DISCOURAGES IMPORTS
Þ DEMAND FOR FOREIGN CURRENCY DECREASES
Þ RATE OF EXCHANGE OF RUPEE ↑(IN TERMS OF US DOLLAR)
Learning Objective – 1 (Factors affecting Exchange Rate)
• Inflation INFLATION IN INDIA INCREASES
Þ FALL IN THE VALUE OF RUPEE
Þ OUTFLOW OF FOREIGN CAPITAL FROM INDIA(TO AVOID FINANCIAL LOSSES)
Þ DEMAND FOR (SAY ) DOLLAR INCREASES
Þ RATE OF EXCHANGE OF RUPEE ↓(IN TERMS OF US DOLLAR)
Learning Objective – 1 (Factors affecting Exchange Rate)
• Financial Policy DEFICIT FINANCINGÞ INFLATIONARY CONDITIONS
Þ FALL IN THE VALUE OF RUPEE
Þ OUTFLOW OF FOREIGN CAPITAL FROM INDIA(TO AVOID FINANCIAL LOSSES)
Þ DEMAND FOR (SAY ) DOLLAR ↑
Þ RATE OFRATE OF EXCHANGE OF RUPEE ↓(IN TERMS OF US DOLLAR)
Learning Objective – 1 (Factors affecting Exchange Rate)
• Bank Rate BANK RATE INCREASES
Þ INTEREST RATE INCREASES
Þ INFLOW OF FOREIGN CAPITAL(TO EARN HIGH INTEREST INCOME)
Þ SUPPLY OF FOREIGN CURRENCY INCREASES
Þ RATE OF EXCHANGE OF RUPEE ↑
Learning Objective – 1 (Factors affecting Exchange Rate)
• Peace & Security PEACE & SECURITY
Þ ATTRACTS FOREIGN CAPITAL
Þ SUPPLY OF FOREIGN CURRENCY INCREASES
Þ RATE OF EXCHANGE OF DOMESTIC CURRENCY ↑
Learning Objective – 1 (Factors affecting Exchange Rate)
• Political Conditions POLITICAL STABILITY
Þ ATTRACTS FOREIGN CAPITAL
Þ SUPPLY OF FOREIGN CURRENCY INCREASES
Þ RATE OF EXCHANGE OF DOMESTIC CURRENCY ↑