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Exchange Rate - Finance Assignment Help

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An exchange rate is the worth one currency in terms of the other. The value of an US Dollar in terms of Euros calculates how much dollar is needed to buy one pound in the international market. When the exchange rate is calculated by the demand for and the supply of foreign currency, it is known as flexible exchange rate. This is just the opposite of the fixed exchange rate system where government intervenes to maintain the currency’s value in a very fine band.

Determining Exchange Rates

Based on the exchange rate we can calculate whether a country’s currency depreciates or appreciates. A country’s currency appreciates if its value arises in terms of the other currency and depreciates if its value reduces in terms of the other currency.

Let us discuss some of the important factors that calculate the floating exchange rate:



Inflation Rate Differential: Countries with better inflation rate (where the price levels are arising at a faster rate) have a depreciation of their currency related to their trading partners.

Interest Rate Differential: International investors are interested to invest in a currency of better interest rate in order to enjoy a higher rate of return. Therefore higher interest rate attracts foreign capital and appreciates the currency.

National Debt or Budget Deficit: A budget deficit happens when the government is spending more than what it is earning. A county with mounting national debt generally deter the foreign direct investment and thereby decrease the value of their currency.

Economic Growth and Political Stability: A stable economic growth of a country enhances the investor’s confidence to invest and thus tends to appreciate the currency in the international market.
Other factors like terms of trade, business cycle, sudden terror attack or war also have major contribution on the exchange rate calculation.

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