Exchange Rate'

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EXCHANGE RATE AND ITS DETERMINATION Presented by Faheem Azeem 1443-110009

'Exchange Rate':

'Exchange Rate' Definition of 'Exchange Rate' The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen

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Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country. Also called rate of exchange or foreign exchange rate or currency exchange rate.

Determination of Exchange Rate:

Determination of Exchange Rate Demand and supply determines the value of any currency against any other currency. Suppose the demand for Rupee is higher due to excess supply of dollar (i.e. more number of people want to convert their dollar in to Rupee), value of dollar will naturally decline against Rupee. This is the fundamental principle of Demand and Supply driven Exchange rate.

Different Methods:

Different Methods ` Gold Standard `It was the earliest method used  for determining the value of a currency… Under the gold standard, currency issuers guarantee to exchange notes, upon demand, in that amount of gold. Governments that employ such a fixed unit of account, and which will redeem their notes to other governments in gold, share a fixed-currency relationship.

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Bretton Woods System This new order came in to existence in 1944. Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, for the United Nations Monetary and Financial Conference. Here the participating countries agreed to fix the value of their currencies with in the fixed value (i.e. plus or minus some percentage in terms of gold) and it was also agreed that IMF would help those nations in case of serious problems in Balance of Payments.

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Demand and Supply This is the simple and most effective method to determine the value of currency which is used almost everywhere worldwide. (With some exceptions and modifications)This is also popularly called as free float system, where the market forces are given a free hand to determine the value of any currency based on Demand and supply for respective currencies.

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