Rate

FACTORS INFLUENCING FOREIGN EXCHANGE RATE

EXCHANGE RATE

•Number of units of one currency that must be given to acquire one unit of a currency of another country

•Buying and Selling Rates

•The buying rate is also known as the ‘bid rate’ and the selling rate as the 'offer rate'.

•The difference between the bid and offer rates for a currency at any time signifies the spread or profit for the banker.

Exchange rate Equilibrium

•It is the point at which the demand and supply curve meet

•It will change over time as supply and demand schedules change.

Factors that influence exchange rate

1.Relative inflation rates

Changes in inflation rates can affect international trade activity, which influence the demand and supply of currencies and therefore influences the exchange rates.

2. Relative Interest rates

Changes in interest rates affect investment in foreign securities, which influences the demand and supply of currencies and it lead to influence exchange rates.

3. Relative Income levels

Changes in income levels can affect the amount of imports demanded; it may leads to affect exchange rates.

4.Government Controls

Imposing foreign exchange barriers like intervening (Buying and selling) in forex marketing.

5. Expectations

Foreign exchange markets react immediately to any news that may have a future effect.

6. OTHER ECONOMIC RISK

•Competitor’s pricing strategy

•Fluctuations in price of raw material

•Factors influencing Demand and supply of one currency

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7. Main Factors

The two main factors that influence the movements in exchange rates are

•Capital flows

•Trade flows

Balance of Payments = Capital flows + Trade flows

•The main purpose of the balance of payments is to quantify demand and supply for a currency of one country over a period of time.

Capital flows

A capital flow is the net quantity of the currency traded (bought or sold) through capital investments.

•Physical flows

when foreign entities sell...