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2_KMBNFM04-Unit 1-Lesson 1.2

The document provides an overview of the foreign exchange market, detailing its decentralized nature and the various participants involved, including banks and individuals. It outlines different types of exchange rates, factors affecting them, and concepts like purchasing power parity and speculation. Additionally, it discusses the role of authorized dealers and mentions the implications of demonetization in controlling black money.

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saurabh prasad
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49 views17 pages

2_KMBNFM04-Unit 1-Lesson 1.2

The document provides an overview of the foreign exchange market, detailing its decentralized nature and the various participants involved, including banks and individuals. It outlines different types of exchange rates, factors affecting them, and concepts like purchasing power parity and speculation. Additionally, it discusses the role of authorized dealers and mentions the implications of demonetization in controlling black money.

Uploaded by

saurabh prasad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Basic Concept

relating to
Foreign
Exchange

Unit 1 lesson 1.2

Dr Saurabh Prasad
Foreign exchange market:
• A forex market refers to a market where different
participants can buy, sell and exchange
currencies. It's a decentralized market i.e.,
foreign exchange activities take place across the
globe in different time zones. So, even when the
Indian market is calling it a day, the US market
is initiating its daily operations. In this way
it keeps on going across then world. As the world
are highly interconnected today, forex market is
always open at some place.
Forex Participants:

• Central &
Commercial banks
• Investment Banks
• Broker
• Individuals
Types of Exchange Rate:

Direct & Cross


Forward
Indirect Rate Spot Rate
Rate
Quotes Mechanism

Bid &
Ready/ Premium &
Tom Offered
Cash Discount
Rate
Authorized Dealers:
Category 1:

• refer to financial institutions that are authorized to handle


all types of fore transactions.

Category 2:

• refer to entities who can deal with buying/selling of foreign


currency, remittances, travelers' cheque, etc.

Category 3:

• refer to entities who are authorized for purchasing of


foreign currency and travelers' cheques only.
Factors affecting Exchange rates:

Country's
Inflation current Government
Interest rates
rates account/Balanc Debt
e of Payments

Political
Terms of Trade Stability & Recession Speculation
Performance
Given a home country and a foreign
country, purchasing power parity
suggests that:

a) the home currency will appreciate if the current home


inflation rate exceeds the current foreign inflation rate;
b) the home currency will depreciate if the current home
interest rate exceeds the current foreign interest rate;
c) the home currency will depreciate if the current home
inflation rate exceeds the current foreign inflation rate.
d) the home currency will depreciate if the current home
inflation rate exceeds the current foreign interest rate;
If purchasing power parity were to
hold even in the short run, then:
• a) real exchange rates should tend to decrease over time;
• b) quoted nominal exchange rates should be stable over
time.
• c) real exchange rates should tend to increase over time;
• d) real exchange rates should be stable over time;
A speculator in foreign
exchange is a person who
• a) buys foreign currency, hoping to profit by selling it a
a higher exchange rate at some later date
• b) earns illegal profit by manipulation foreign exchange
• c) causes differences in exchange rates in different
geographic markets
• d) None of the above
According to the Purchasing
Power Parity (PPP) theory,
• a) Exchange rates between two national currencies will
adjust daily to reflect price level differences in the two
countries
• b) In the long run, inflation rates in different countries
will equalize around the world
• c) In the long run, the exchange rates between two national
currencies will reflect price-level differences in the two
countries
• d) None of the above
In a quote exchange rate, the currency that
is to be purchase with another currency is
called the

• a) liquid currency
• b) foreign currency
• c) local currency
• d) base currency
Which of the following is NOT a criticism
of a flexible exchange rate system?
• a) Flexible exchange rates tend to be variable and
therefore cause more uncertainty
• b) Flexible exchange rate systems require discipline on the
part of central banks that may not be forthcoming
• c) Under flexible exchange rates, trading countries tend to
rely more heavily upon tariffs and other restrictions
• d) The flexible exchange rate system reduces the power of
fiscal policy
Demonetization is when
currency notes and
coins are withdrawn.
The reason given in the
D E M O N E T I Z AT
past were to curb and
ION
control black money or
to introduce new notes.

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