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    How Can Calculate Exchange Rate

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    Honey Singh
    Exchange rates measure the relative price of one currency to another. An increase in demand for a foreign currency will cause its price to rise in the domestic currency. If a currency can buy less of another currency, it has depreciated, while the other currency has appreciated. Depreciation and appreciation can be calculated using formulas comparing the old and new exchange rates. Interest rates, inflation rates, and GNP growth rates influence exchange rates. Exchange rates can be fixed by government intervention or allowed to float based on market forces. Foreign exchange derivatives like forwards, swaps, futures, and options allow parties to manage currency risk.

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    How Can Calculate Exchange Rate

    Uploaded by

    Honey Singh
    141 views12 pages
    Exchange rates measure the relative price of one currency to another. An increase in demand for a foreign currency will cause its price to rise in the domestic currency. If a currency can buy less of another currency, it has depreciated, while the other currency has appreciated. Depreciation and appreciation can be calculated using formulas comparing the old and new exchange rates. Interest rates, inflation rates, and GNP growth rates influence exchange rates. Exchange rates can be fixed by government intervention or allowed to float based on market forces. Foreign exchange derivatives like forwards, swaps, futures, and options allow parties to manage currency risk.

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    Exchange rates measure the relative price of one currency to another. An increase in demand for a foreign currency will cause its price to rise in the domestic currency. If a currency can buy less of another currency, it has depreciated, while the other currency has appreciated. Depreciation and appreciation can be calculated using formulas comparing the old and new exchange rates. Interest rates, inflation rates, and GNP growth rates influence exchange rates. Exchange rates can be fixed by government intervention or allowed to float based on market forces. Foreign exchange derivatives like forwards, swaps, futures, and options allow parties to manage currency risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    141 views12 pages

    How Can Calculate Exchange Rate

    Uploaded by

    Honey Singh
    Exchange rates measure the relative price of one currency to another. An increase in demand for a foreign currency will cause its price to rise in the domestic currency. If a currency can buy less of another currency, it has depreciated, while the other currency has appreciated. Depreciation and appreciation can be calculated using formulas comparing the old and new exchange rates. Interest rates, inflation rates, and GNP growth rates influence exchange rates. Exchange rates can be fixed by government intervention or allowed to float based on market forces. Foreign exchange derivatives like forwards, swaps, futures, and options allow parties to manage currency risk.

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    Harish Kumar MBA (IB)

    Introduction
    Exchange rates are used to value one currency in

    relation to another currency. This module focuses on understanding the meaning of exchange rates and how changes in the rates impact prices in general. Exchange rate The price of a unit of foreign currency in terms of domestic currency for immediate purchase.
    The exchange rate E measures the relative price of one

    currency in terms of another.

    Increased demand
    As more foreign goods are demanded, the price of the foreign currency in local currency increase and vice versa.

    Home Currency Depreciation


    If a currency starts to buy less of another currency we say it has depreciated against that currency

    Foreign currency becomes more valuable than

    the home currency. Conversely, the foreign currencys value has appreciated against the home currency.

    Calculating a Depreciation:

    Currency Depreciation

    Where:e0 = old currency value e1 = new currency value

    e0 e1 e1

    EXAMPLE: US$ Depreciation


    We use the first formula, (e0 - e1)/ e1 substituting (.64 - .68)/ .68 = - 5.88% which was the US$ depreciation

    EXAMPLE: Appreciation
    If a currency starts to buy more of another currency we say it has appreciated against that currency If the dollar value of the dm goes from $0.64 (e0) to $0.68 (e1), then the dm has appreciated by

    e1 e0 e0
    = (.68 - .64)/ .64 = 6.25%

    1. 2. 3.

    Inflation rates Interest rates GNP growth rates

    Fixed exchange rate

    Where a countrys exchange rate does not

    fluctuate at all (or only narrowly) against some base currency over a sustained period, usually a year or longer.
    Government intervention in the market for

    foreign exchange is needed to maintain the fixed exchange rate.

    A countrys exchange rate typically fluctuates over

    time.
    The government makes no attempt to peg the

    exchange rate against a base currency. Appreciations and depreciations may occur from year to year, each month, even by the day or every minute. The amplitude or volatility of these fluctuations may vary greatly from one floating regime to another

    Foreign Exchange Derivatives


    Forwards A and B agree to trade currencies at set price on the settlement date. Contract cannot be traded to third parties.
    Swaps A and B agree to trade at set price today and do reverse trade at a set price in the future. Swaps combine two contracts (a spot and a forward) into one, taking advantage of lower transactions costs.

    Futures A and B agree to trade currencies at set price in the future. Either side of contract can be traded to third parties C, D, E, (on exchanges). Parties left holding contract must deliver.
    Options A grants to B option to buy (call) or sell (put) currencies from/to A, at set price in the future. B may or may not execute the option, but if B opts to execute the contract then A must deliver.

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