Grading

Exchange Rates

What Is Exchange Rate?

It is the price of one currency in terms of another, for example £1: $1.5

http://www.x-rates.com/calculator.html<-- you can go on this website for exchange rate calculation!


How to Convert Currencies?

e.g. when the rate of £1 = $1.90

• To convert £5.70 to $, multiply 5.70 x 1.90 = $10.83
• To convert $3.45 to £ at the same rate, divide 2.45 by 1.90=£1.82.

How are exchange rates determined?
Most currencies are allowed to vary or float on the foreign exchange market according to the demand and supply for each currency- exchange rate can vary between currencies on a day-by-day basis depending on supply and demand for currencies.

-Supply and Demand Graph-

<- click for a bigger image.

The Demand and Supply of Currencies Is In Turn Determined By:
• Relative interest rates
• The demand for imports
• The demand for exports
• Investment opportunities
• Speculative sentiments
• Global trading patterns
• Changes in relative inflation rates


Appreciation of the Exchange Rate:
A rise in the value of one currency in relation to other currencies.

e.g.
£1: $1.5 -> £1: $1.8This means…

1. UK exports become more expensive
2. Imports to the UK become cheaper


Depreciation of the exchange rate:
A fall in the value of one currency in relation to other currencies.

£1: $1.5 -> £1: $1.3

This means…

1. UK exports become cheaper
2. Imports to the UK become more expensive


VERY IMPORTANT:

A depreciation in exchange rate in demand for exports leads to a rise in demand for exports, and a fall in demand for imports.

An appreciation of the exchange rate leads to a fall in demand for exports and a rise in demand for imports.


Floating Exchange Rates:
The price is determined ONLY by the demand and supply of the currency – there's NO government intervention.


Fixed Exchange Rates:
The value of a currency is FIXED in relation to an anchor currency – it's NOT allowed to be fluctuated.


Dirty Floating or Managed Exchange Rate:
The rate is influenced by the GOVERNMENT through the central bank around a PREFFERED rate.


exchange rate joke (:
An Asian man walked into the currency exchange in New York with 2000 yen, and walked out with $72.00.
The following week, he walked in with 2000 yen, and was handed $66.00. He asked the teller why he got less money than he had gotten the previous week. The clerk replied, “Fluctuations.”
The Asian man stormed out, and just before slamming the door, he turned around and said, “Fluc you Amelicans too!”

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