Exchange of Currency between two Countries

Foreign Exchange: Exchange of Currency between two Countries

Foreign currency required at the time of financial transaction from one country to another country.  There are currency for every country like dollar ($)  for US, Rupees for India, Pound for Britain etc. Currency of various countries are traded in the foreign exchange market.

Foreign exchange rate is the price of a country’s currency in the terms of another country’s currency in the form of Bid & Ask rate. The exchange rate take place either  fixed exchange rate or flexible exchange rate.

Under the fixed exchange rate,  the government of a country determines the exchange rate of its currency in terms of a foreign currency  instead of being determined by demand for and supply. It ensures stability in exchange rates, promotes capital movements, prevents capital outflow,prevents speculation in foreign exchange market &  it forces government to keep inflation in check.

Under the flexible exchange rate,  the value of a currency is allowed to vary freely as determined by demand for and supply of foreign exchange.  India follows flexible exchange rate system. It eliminates the problem of overvaluation or undervaluation of currencies,deficit of surplus in Balance of payment (BOP) is automatically corrected under this system, it frees the government from problem of BOP, there is no need for the government to hold any reserves &  it enhances the efficiency in the economy by achieving optimum resource allocation.

If spot price is Rs62/$ on 28 March 2015. It means if we want to buy/sell a dollar then we should pay Rs.62 plus transaction cost  to buy a $ and if we want to sell a $ then we will receive Rs.62 less transaction cost.

If spot price is Rs.62 on 28 march 2015, and the price on 29 march become Rs.63 then it will gain to the exporter but loss to the importer. On the other hand the spot price on 30 march  become Rs.61 then it will be loss to the exporter and gain to the importer.

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