introduction to currency market

1. Introduction to Currency Markets

2. Learning Objectives
To Understand
• Foreign Exchange & Foreign Exchange Rate
• Foreign Exchange Market

3. Learning Objective – 1
(Meaning of Foreign Exchange Rate)
Exchange rate is the price of a country’s currency
in terms of another country’s currency.

4. 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.

5. Learning Objective – 1
(Determination of Exchange Rate)
• Bretton Wood System • Representatives of different
countries, in July 1944 met at
Bretton Woods, New
Hampshire, USA

6. 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.

7. 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.

8. Learning Objective – 1
(Determination of Exchange Rate)
• Exchange Rate System • Dollarization
after Bretton Woods • Fixed exchange rate
• Floating exchange rate

9. Learning Objective – 1
(Determination of Exchange Rate)
• Exchange Rate System
after Bretton Woods Use of foreign currency
in parallel to or instead of
Dollarization domestic currency

10. Learning Objective – 1
(Determination of Exchange Rate)
• Exchange Rate System
after Bretton Woods The value of a currency is
determined by
Fixed Exchange Rate the government

11. Learning Objective – 1
(Determination of Exchange Rate)
• Exchange Rate System
after Bretton Woods The value of a currency is
determined by
Floating Exchange demand for and supply of
Rate foreign exchange

12. Learning Objective – 1
(Factors affecting Exchange Rate)
• Trade Movement • Control of Foreign Exchange
• Capital Flow • Inflation
• Granting of Loans • Financial Policy
• Sale and Purchase of • Bank Rate
Securities • Peace & Security
• Speculation • Political Conditions
• Protection

13. Learning Objective – 1
(Factors affecting Exchange Rate)
• Trade Movement If
Import > Export => Depreciation in the
value of the currency
Import < Export => Appreciation in the
value of the currency

14. 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.

15. Learning Objective – 1
(Factors affecting Exchange Rate)
• Granting of Loans
Receiving of loans from a foreign country
appreciates the value of the currency

16. 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

17. Learning Objective – 1
(Factors affecting Exchange Rate)
• Speculation (SAY) SPECULATORS EXPECT VALUE OF DOLLAR ↑
PURCHASE DOLLARS TO EARN PROFIT IN
FUTURE
DEMAND FOR DOLLAR INCREASES
RATE OF EXCHANGE OF RUPEE ↓
(IN TERMS OF US DOLLAR)

18. Learning Objective – 1
(Factors affecting Exchange Rate)
• Protection PROTECTION DISCOURAGES IMPORTS
DEMAND FOR FOREIGN CURRENCY DECREASES
RATE OF EXCHANGE OF RUPEE ↑
(IN TERMS OF US DOLLAR)

19. Learning Objective – 1
(Factors affecting Exchange Rate)
• Exchange Control EXCHANGE CONTROL DISCOURAGES IMPORTS
DEMAND FOR FOREIGN CURRENCY
DECREASES
RATE OF EXCHANGE OF RUPEE ↑
(IN TERMS OF US DOLLAR)

20. Learning Objective – 1
(Factors affecting Exchange Rate)
• Inflation INFLATION IN INDIA INCREASES
FALL IN THE VALUE OF RUPEE
OUTFLOW OF FOREIGN CAPITAL FROM INDIA
(TO AVOID FINANCIAL LOSSES)
DEMAND FOR (SAY ) DOLLAR INCREASES
RATE OF EXCHANGE OF RUPEE ↓
(IN TERMS OF US DOLLAR)

21. Learning Objective – 1
(Factors affecting Exchange Rate)
• Financial Policy DEFICIT FINANCING
INFLATIONARY CONDITIONS
FALL IN THE VALUE OF RUPEE
OUTFLOW OF FOREIGN CAPITAL FROM INDIA
(TO AVOID FINANCIAL LOSSES)
DEMAND FOR (SAY ) DOLLAR ↑
RATE OFRATE OF EXCHANGE OF RUPEE ↓
(IN TERMS OF US DOLLAR)

22. Learning Objective – 1
(Factors affecting Exchange Rate)
• Bank Rate BANK RATE INCREASES
INTEREST RATE INCREASES
INFLOW OF FOREIGN CAPITAL
(TO EARN HIGH INTEREST INCOME)
SUPPLY OF FOREIGN CURRENCY INCREASES
RATE OF EXCHANGE OF RUPEE ↑

23. Learning Objective – 1
(Factors affecting Exchange Rate)
• Peace & Security PEACE & SECURITY
ATTRACTS FOREIGN CAPITAL
SUPPLY OF FOREIGN CURRENCY
INCREASES
RATE OF EXCHANGE OF DOMESTIC
CURRENCY ↑

24. Learning Objective – 1
(Factors affecting Exchange Rate)
• Political Conditions POLITICAL STABILITY
ATTRACTS FOREIGN CAPITAL
SUPPLY OF FOREIGN CURRENCY
INCREASES
RATE OF EXCHANGE OF DOMESTIC
CURRENCY ↑