4. However, in all the cases, bank plays its significant role and supplies information relating to maximize its income and to reduce its risks position stemming from contracts with other customers. 3. Besides, the American firms and individuals who want to buy assets in India, such as bonds and equity shares of Indian companies or wish to make loans to the Indian individuals and firms will also supply dollars. With this, therefore, a dollar’s worth of US goods could be purchased with fewer rupees, that is, the US goods would become cheaper in terms of rupees for Indians. 45.50. Conversely, a low exchange rate causes exchange rate to fall. (i) Investment (including privates and publics, direct and indirect); (ii) Commercial transactions relating to goods and services; (vi) Transactions with international institutions; The price of one unit of foreign currency in terms of domestic currency is determined which is known as rate of foreign exchange. This will discourage the imports of US goods to India causing a decrease in quantity demanded of dollars for imports. When the prices of currencies are affected by the demand and supply for the same, it assists the market to bring an equilibrium position. Project Report on the Factors Affecting the Foreign Exchange Rate: It is common to all that in a free market, the equilibrium exchange rate is determined by the forces of demand and supply.
(iv) According to Keynes, this theory has got two basic defects: (a) it does not take into consideration the elasticity of reciprocal demand and (b) it ignores the influence of capital movements. We assume that there are two countries, India and USA, the exchange rate of their currencies (namely, rupee and dollar) is to be determined. All outstanding forward contracts and currency futures must be accepted by both the parties at the date of delivery.
10,000 (i.e., $10,000 * Rs.
It therefore follows from above that at a lower price of dollars, the greater quantity of dollars is demanded for imports from the USA and at a higher price of dollar, the smaller quantity of dollars is demanded for imports from the USA by the Indians. It can also be expressed in a simple style. The greater the imports of goods and services from the USA, the greater the demand for the US dollars by the Indians. If 5 UK pounds or 5 US dollars buy Indian goods worth Rs. 35.1.What determines the supply of dollars in the foreign exchange market? to determine an exchange rate. There are different types of swaps. Thus, the risk is due 011 both the prices (placing order and settling the transactions) for such delay in terms of foreign currency. (i) The floating or flexible rate of exchange and It brings hazards in international trade Moreover, it is risky and uncertain prejudicial to the development. On the other hand, if the price of dollar in terms of rupees falls (i.e. Needless to mention that problems arise for receipts and payments for such transactions. (i) When the exporter finds that his own currency is gradually depreciating, (ii) When the state of his country prefers to take other currency in some exceptional cases, and (iii) When the exporter of goods desires to make payment for his own imports from another country and the later country accepts the same currency. It is the demand for and supply of a foreign currency or exchange that will determine the exchange rate between the two. the risk of fluctuation is the rate of exchange. 350 Indian rupee. which affect the pattern of comparative advantages may or often affect also the rate of exchange. (iii) Each appropriate authority must make necessary arrangement for the domestic supply of its own money if there is any persistent inflow or outflow of gold. 44 per dollar, there will emerge the excess demand for dollars.
But if the Indian shawl- maker decides to go abroad, he must exchange Indian rupee into franc or dollar or pound or euro.To facilitate this exchange form, banking institutions appear.
Thus, the expected cost of forward hedging is equal to the known cost of foreign currency if the same is bought forward minus the expected cost of foreign currency when the same is bought spot. The Indian individuals, firms or Government who import goods from the USA into India. Under this method, the rates of foreign exchange fluctuates from day to day according to the demand and supply condition of the market. Thus, an exchange rate can be regarded as the price of one currency in terms of another. The demand for US dollars comes from the Indian people and firms who need US dollars to pay for the goods and services they want to import from the USA. The supply of these dollars by the Indians working in the USA popularly called remittances from the USA also adds to the supply of dollars. The observation leads to the Purchasing Power Parity (PPP) Theory of exchange rate. 46 the quantity supplied of dollars exceeds the quantity demanded. In addition, this analysis also depends on the expected values of future economic fundamentals. Naturally, if the arbitrage is quite and even a portion of such benefit is passed on to the client, no doubt, the concerned firm may reduce its cost of funds and also reduce its exposer to un-appropriated market rate.
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