CHAPTER 11 FOREIGN EXCHANGE RATE
Q1. What is Foreign Exchange rate?
Ans. Foreign exchange rate refers to the rate at which one currency is exchange for the other it is it represents the price of
one currency in terms of another currencies.
Types of exchange rate systems
Fixed exchange rate system or pegged exchange rate system; It refers to a system in which exchange rate for a currency
is fixed by the government such a rate does not vary with changes in demand and supply of foreign currency only
government has the power to change it.
There are two type of fixed exchange rate.
Gold Standard System (1880 to 1914); Gold Standard System of exchange rate is an old variant of fixed exchange rate
system under this system each currency value was defined in terms of gold and hence the exchange rate was fixed according
to the gold value of currencies that have to be exchanged this was referred to as mint per value of exchange.
Bretton wood system or adjustable peg system ; In this system allowed some adjustment so it was called adjustable peg
system of exchange according to the system different currencies were pegged or related to one currency that is US dollar US
dollar was assigned gold value at a fixed price value of one currency in terms of US dollar ultimately implied value of that
currency in terms of gold. gold continue to be the ultimate unit of parity between any two currencies.
Flexible exchange rate system or floating exchange rate system; flexible exchange rate system refers to a system in
which exchange rate is determined by forces of demand and supply of different currencies in the foreign exchange market
the value of a currency is allowed to fluctuate freely accordingly to change in the demand and supply of foreign exchange
there is no official government intervention in the foreign exchange market.
Managed Floating rate system; it refers to a system in which foreign exchange rate is determined by market forces and
Central Bank influences the exchange rate through intervention in the foreign exchange market it is a hybrid of fixed
exchange rate and a flexible exchange rate system like flexible exchange rate system exchange rate is primarily determined
by forces of demand and supply and like fixed exchange rate system exchange rate is managed by way of intervention by
RBI
Q2. What is par rate of exchange or equilibrium rate of exchange?
Ans. The exchange rate at which demand for foreign currency is equal to its supply is called per rate of exchange or
equivalent of exchange.
Q3. What is currency depreciation?
Ans. Currency depreciation refers to a situation when domestic currency depreciates or loss its value in relation to a foreign
currency so that you need more rupees to buy a dollar.
Q4. What is currency appreciation ?
Ans. Currency appreciation refers to a situation when domestic currency appreciates or gain its value in relation to a foreign
currency so that you need to less rupee to buy a dollar.
Q5. What is Devaluation?
Ans. Devaluation of the domestic currency occurs when the value of the domestic currency is deliberately reduced by the
government by raising the exchange rate the market forces of supply and demand play no roll in it.
Q6. What is revaluation?
Ans. The revaluation of the domestic currency occurs when the value of the domestic currency is deliberately raised by the
government by lowering the exchange rate the market forces of supply and demand play no roll in it.
Q1. What is Foreign Exchange rate?
Ans. Foreign exchange rate refers to the rate at which one currency is exchange for the other it is it represents the price of
one currency in terms of another currencies.
Types of exchange rate systems
Fixed exchange rate system or pegged exchange rate system; It refers to a system in which exchange rate for a currency
is fixed by the government such a rate does not vary with changes in demand and supply of foreign currency only
government has the power to change it.
There are two type of fixed exchange rate.
Gold Standard System (1880 to 1914); Gold Standard System of exchange rate is an old variant of fixed exchange rate
system under this system each currency value was defined in terms of gold and hence the exchange rate was fixed according
to the gold value of currencies that have to be exchanged this was referred to as mint per value of exchange.
Bretton wood system or adjustable peg system ; In this system allowed some adjustment so it was called adjustable peg
system of exchange according to the system different currencies were pegged or related to one currency that is US dollar US
dollar was assigned gold value at a fixed price value of one currency in terms of US dollar ultimately implied value of that
currency in terms of gold. gold continue to be the ultimate unit of parity between any two currencies.
Flexible exchange rate system or floating exchange rate system; flexible exchange rate system refers to a system in
which exchange rate is determined by forces of demand and supply of different currencies in the foreign exchange market
the value of a currency is allowed to fluctuate freely accordingly to change in the demand and supply of foreign exchange
there is no official government intervention in the foreign exchange market.
Managed Floating rate system; it refers to a system in which foreign exchange rate is determined by market forces and
Central Bank influences the exchange rate through intervention in the foreign exchange market it is a hybrid of fixed
exchange rate and a flexible exchange rate system like flexible exchange rate system exchange rate is primarily determined
by forces of demand and supply and like fixed exchange rate system exchange rate is managed by way of intervention by
RBI
Q2. What is par rate of exchange or equilibrium rate of exchange?
Ans. The exchange rate at which demand for foreign currency is equal to its supply is called per rate of exchange or
equivalent of exchange.
Q3. What is currency depreciation?
Ans. Currency depreciation refers to a situation when domestic currency depreciates or loss its value in relation to a foreign
currency so that you need more rupees to buy a dollar.
Q4. What is currency appreciation ?
Ans. Currency appreciation refers to a situation when domestic currency appreciates or gain its value in relation to a foreign
currency so that you need to less rupee to buy a dollar.
Q5. What is Devaluation?
Ans. Devaluation of the domestic currency occurs when the value of the domestic currency is deliberately reduced by the
government by raising the exchange rate the market forces of supply and demand play no roll in it.
Q6. What is revaluation?
Ans. The revaluation of the domestic currency occurs when the value of the domestic currency is deliberately raised by the
government by lowering the exchange rate the market forces of supply and demand play no roll in it.
