International Finance Tutorial
Foreign Exchange Markets
International Capital Markets
Hedging & Risk Management
Strategic Decision Making
International Finance Resources
Selected Reading
Foreign Exchange Markets
International Capital Markets
- International Equity Markets
- International Bond Markets
- International Money Market
- Forex Intervention
- Interest Rates
- Exchange Rates
- Monetary Assets
- The Interest Rate Parity Model
Hedging & Risk Management
- Economic Exposure
- Translation Exposure
- Transaction Exposure
- Foreign Currency Futures & Options
- Exchange Rate Fluctuations
- Exchange Rate Forecasts
Strategic Decision Making
- International Trade Finance
- Working Capital Management
- Long-Term and Short-Term Financing
- Foreign Direct Investment
International Finance Resources
- International Finance - Discussion
- International Finance - Resources
- International Finance - Quick Guide
Selected Reading
- Who is Who
- Computer Glossary
- HR Interview Questions
- Effective Resume Writing
- Questions and Answers
- UPSC IAS Exams Notes
Exchange Rates
International Finance - Exchange Rates
Due to demand and supply, there is always an exchange rate that keeps changing over time. The rate of exchange is the price of one currency expressed in terms of another. Due to increased or decreased demand, the currency of a country always has to maintain an exchange rate. The more the exchange rate, the more is the demand of that currency in forex markets.
Exchanging the currencies refer to trading of one currency for another. The value at which an exchange of currencies takes place is known as the exchange rate. The exchange rate can be regarded as the price of one particular currency expressed in terms of the other one, such as £1 (GBP) exchanging for US$1.50 cents.
The equipbrium between supply and demand of currencies is known as the equipbrium exchange rate.
Example
Let us assume that both France and the UK produce goods for each other. They will naturally wish to trade with each other. However, the French producers will have to pay in Euros and the British producers in Pounds Sterpng. However, to meet their production costs, both need payment in their own local currency. These needs are met by the forex market which enables both French and British producers to exchange currencies so that they can trade with each other.
The market usually creates an equipbrium rate for each currency, which will exist where demand and supply of currencies intersect.
Changes in Exchange Rates
Changes in currency exchange rate may occur due to changes in demand and supply. In case of a demand and supply graph, the price of a currency, say Sterpng, is expressed in terms of another currency, such as the $US.
When exports increase, it would shift the demand curve for Sterpng to the right and the exchange rate will go up. One Pound was bought at $1.50, but now it buys $1.60, hence the value has gone up.
Note − The world’s three most common currency transactions are exchanges between the Dollar and the Euro (30%), the Dollar and the Yen (20%), and the Dollar and the Pound Sterpng (12%).
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