Foreign Exchange Rate Foreign Exchange- refers to all currencies other than domestic currency eg-USdollar, British pound
Foreign Exchange Rate- The rate at which currency of one country can be exchanged for the currency of the other country .
Types of Exchange Rates:
a) Fixed Exchange Rate System
b) Flexible Exchange Rate System
c) Managed Floating
Fixed Exchange Rate System- rate which is officially fixed by the government or financial authority in terms of gold or any other currency.
Example-
If $1 = 200gms of gold Rs 50 = 200 gms of gold Then, $1 = Rs 50
Flexible Rate of Exchange- refers to rate of foreign exchange determined by the forces of demand & supply of foreign exchange.
Equilibrium Exchange Rate- is a rate at which demand & supply of foreign exchange are equal.
Depriciation of currency- When the value of domestic currency decreases in terms of foreign currency it is called depriciation of domestic currency.
eg- Rs 50 = $ 1 Rs 60 = $ 1
Appreciation of currency- When the value of domestic currency increases in terms of foreign currency it is called appreciation of domestic currency.
eg- Rs 60 = $ 1 Rs 50 = $ 1
Managed floating- It is the system under which foreign exchange rate is determined by the forces of demand and supply but there is occasional intervention by the central bank with certain rules and regulations to control the exchange rate so that it does not slip out of the desired limits.
Dirty floating- When rules and regulations are not followed by central bank while managing the exchange rate then managed floating becomes the dirty floating.
Foreign exchange market- The market in which national currencies of various countries are converted for one another is known as foreign exchange market.
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