PPT: Exchange Rate and Its Economic Effects | Business Economics for CA Foundation PDF Download

 Page 1


Exchange Rate and Its Economic 
Effects
Page 2


Exchange Rate and Its Economic 
Effects
I n t r o d u c t i o n
News about currency fluctuations like the Rupee strengthening against the 
US dollar are common. What do these terms mean?
International transactions require exchanging currencies, creating markets 
that determine currency prices beyond domestic supply and demand.
Page 3


Exchange Rate and Its Economic 
Effects
I n t r o d u c t i o n
News about currency fluctuations like the Rupee strengthening against the 
US dollar are common. What do these terms mean?
International transactions require exchanging currencies, creating markets 
that determine currency prices beyond domestic supply and demand.
The Exchange Rate
A foreign currency transaction involves any transaction denominated or settled in a 
foreign currency.
Buying or Selling Goods or Services
When prices are specified in a 
foreign currency.
Borrowing or Lending Funds
When amounts are denominated in a 
foreign currency.
Entering into a Forward Exchange 
Contract
Committing to exchange currencies 
at a future date.
Acquiring or Disposing of Assets
When assets or liabilities are 
denominated in a foreign currency.
Page 4


Exchange Rate and Its Economic 
Effects
I n t r o d u c t i o n
News about currency fluctuations like the Rupee strengthening against the 
US dollar are common. What do these terms mean?
International transactions require exchanging currencies, creating markets 
that determine currency prices beyond domestic supply and demand.
The Exchange Rate
A foreign currency transaction involves any transaction denominated or settled in a 
foreign currency.
Buying or Selling Goods or Services
When prices are specified in a 
foreign currency.
Borrowing or Lending Funds
When amounts are denominated in a 
foreign currency.
Entering into a Forward Exchange 
Contract
Committing to exchange currencies 
at a future date.
Acquiring or Disposing of Assets
When assets or liabilities are 
denominated in a foreign currency.
Understanding Exchange Rate Regimes
Exchange rate regimes determine how countries manage their currency values relative to foreign 
currencies.
Free-Floating Exchange Rate
Exchange rates determined by 
private market forces without 
government intervention.
Managed Float Exchange Rate
Currency values change but 
governments actively 
participate to influence rates.
Fixed Exchange Rate
Governments fix currency 
values through market 
participation or regulatory 
policies.
Page 5


Exchange Rate and Its Economic 
Effects
I n t r o d u c t i o n
News about currency fluctuations like the Rupee strengthening against the 
US dollar are common. What do these terms mean?
International transactions require exchanging currencies, creating markets 
that determine currency prices beyond domestic supply and demand.
The Exchange Rate
A foreign currency transaction involves any transaction denominated or settled in a 
foreign currency.
Buying or Selling Goods or Services
When prices are specified in a 
foreign currency.
Borrowing or Lending Funds
When amounts are denominated in a 
foreign currency.
Entering into a Forward Exchange 
Contract
Committing to exchange currencies 
at a future date.
Acquiring or Disposing of Assets
When assets or liabilities are 
denominated in a foreign currency.
Understanding Exchange Rate Regimes
Exchange rate regimes determine how countries manage their currency values relative to foreign 
currencies.
Free-Floating Exchange Rate
Exchange rates determined by 
private market forces without 
government intervention.
Managed Float Exchange Rate
Currency values change but 
governments actively 
participate to influence rates.
Fixed Exchange Rate
Governments fix currency 
values through market 
participation or regulatory 
policies.
Advantages of Free-Floating Exchange Rate
Self-regulating system requiring 
no government intervention
Market forces restrain large 
swings in demand or supply
Acts as a buffer, insulating the 
economy from international events.
E x a m p le : Increased demand for 
Canadian goods raises demand for 
Canadian dollars, making Canadian 
goods more expensive and 
absorbing some impact of foreign 
demand.