chap no 4 ifm

8/3/2019 chap no 4 ifm

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Presented by:

Farman Saddique

Hafiz Muhammad Iqbal

Muhammad Maaz Jawad Asif





Measurement of Exchange Rate

Movements

Percentage in Foreign Currency Value:

S- /

S=spot rate at recent date =spot rate at earlier date



Calculation of in Foreign

Currency

Year=2005 Year=2006

Price=Rs80/$ Price=Rs85/$

in ForeignC

urrency Value= 85-80/80=0.0625

=6.25%



The basic factor for determining the value of a

currency are:- Demand of currency.

Supply of currency.

In equilibrium demand and supply meet at one

point. Demand is same as that of supply.



Demand of Currency



Supply of Currency



Equilibrium of Currency



Factors that Influence Exchange Rates

e=f(INF, INT, INC, GC, EXP)

INF=C

hange in the differential between U.S.inflation and the foreign country·s inflation

INT=Change in the differential between U.S. interest

rate and the foreign country·s interest rate



Factors that Influence Exchange Rates

INC=Change in the differential between U.S. income

level and the foreign country·s income level

GC=Change in the government controls

EXP=Change in expectations of future exchange

rates



Relative Inflation Rates

Changes in relative inflation rates can affect

international trade activity, which influence the

demand for and supply of currencies and therefore

influences exchange rates.



Movement in Inflation

Inflation increase in U.K

U.S U.K



Relative Interest Rates

Changes in relative interest rates affect investment

in foreign securities, which influence the demand for

and supply of currencies and therefore influences

exchange rates.



Relative Interest Rates

Interest Rates increased in U.K

U.S U.K



Relative Income Levels

Income levels affects the exchange rates. Because

income can affect the amount of imports demanded,

it can affect exchange rates.

Example= Assume that the U.S income level rises



Government Controls

Imposing Foreign Exchange Barriers

Imposing Foreign Trade Barriers

Intervening in Foreign Exchange Marketes Macro Variables (inflation, interest rates and

income levels)



Anticipated Exchange Rates

Anticipated Exchange Rates can affect the flow of

different foreign currencies.

Demand for currency may be rise.

Demand for currency may be fall.

Supply of currency may be rise.

Supply of currency may be fall.



Speculations

Currency Lending Rate Borrowing Rate

U.S $ 6.72% 7.20%

New zeland $ 6.48% 6.9% Borrow $100,000

Borrow $ 200,000



Impact of Signals on Currency

Speculation

News

Future actions of Investors

Rise in currency demand & supply



Conclusion

Exchange Rate movements can affect the

transactional amounts of MNC·s adversely.

With the help of speculations of exchange rates we

can earn profits without any investment.

Exchange Rate movements can change the accounts

of government regarding BOP.

Documents

chap no 4 ifm