FOREIGN EXCHANGE MANAGEMENT

tools of international exchange

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What is Foreign Exchange ?

Foreign exchange is the trade in which exchange of the currencies between different nations takes place

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Indias Share in Forex Reserves

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The Nature Of Foreign Exchange

No trading field Main features of the foreign exchange currency market is that it has no centralized market like a stock exchange Freedom to operate With 24 hours of uninterrupted operation, from Monday to Friday each week, free from any time and spatial barrier is an ideal environment for investors. Perpetual motion in prices Fluctuations in the exchange rate change will cause one currency to lose its monetary value, and at the same time increase the monetary value of another currency. Unlimited Potential for Profit and Loss If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade

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Demand for & Supply Foreign Exchange

Foregin Exchange, or the currency of another country, is usually wanted, not for itself, but for what it will buy in its country of issue. The demand for and supply of foreign exchange rates takes on the characteristics of the

goods, services, and capital

that it is desired to acquire or that gave rise to the supply.

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Demand for & Supply Foreign Exchange

The price elasticity of the demand for foreign exchange refers to the response of buyers to a change in the rate of exchange, demand is considered elastic. If, on the other hand, buyers react slightly to changes in exchange rates, demand is held to be inelastic. Supply Elasticity is related to the cost of production of exports, since, for most countries, the largest share of foreign exchange is that gained by the export of merchandise and services.

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Why Foreign Exchange ?

Import Export FII Charity

FDI

Sources of Forex
(Rendered & Consumed)

Money Transfer

Services

Tourist

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Exchange rate regimes

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An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors.

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Basic Types of Exchange Rate Regimes

Floating Exchange Rate Regime

Pegged Exchange Rate Regime

Fixed Exchange Rate Regime

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Floating Exchange Rate Regime

A countrys currency is set by the foreignexchange market through supply and demand for that particular currency relative to other currencies. In a floating exchange rate system the value of the currency is affected by everyday markets for supply and demand. Therefore trade and capital flows play a big role in determining the currencys value.

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Contd..

There are two different types of floating exchange rate systems. Dirty Float and Clean Float and this depends on whether or not there is government intervention. In this type of exchange rate regime, the currency value is influenced by the movements in the financial market. In other words, the market controls the movements of the exchange rate.

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Pegged Exchange Rate Regime

In this, the central bank of a country works towards keeping the currency rate from deviating too far from a target value by taking various measures. This is most common under developing countries as well as communist countries. Its somewhat similar to a fixed exchange rate however a pegged rate has a wider range of value versus the fixed exchange rate.

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Contd..

Crawling Band- When the exchange rate follows a simple trend and if there is any variation than its called a crawling band. Crawling Peg- A type of fixed regime that has special legal and procedural rules designed to make the peg harder which means more durable.

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Fixed Exchange Rate Regime

This exchange rate regime binds the currency of one country to another currency. This is most common example in this case are currencies such as the U.S. dollar or the euro. In a fixed exchange rate system the government or central bank intervenes in the currency market so that the exchange rate stays close to an exchange rate target.

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Contd.

The central bank is unable to affect the exchange rate through monetary policy. However, the central bank can use fiscal expansion to create an excess demand for the currency causing a rise in domestic output. The central bank will then purchase foreign assets to increase the money supply, and prevent the interest rate from rising causing an appreciation. Due to these limitations the government of a country with a fixed exchange rate will want to control the amount of currency they let in and out. This will prevent any unwanted destabilization of the domestic currency.

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