Factors Affecting Exchange Rate

Forward Rate
Type of Quotation
Presented By
Aji R Lal
Aji R Lal
Factors which influence the Exchange rate
Exchange rates are determined y supply and demand!
For example" if there was greater demand for American goods
then there would tend to e an appreciation #increase in $alue%
of the dollar! &f mar'ets were worried aout the future of the
() economy" they would tend to sell dollars" leading to a fall
in the $alue of the dollar!
Appreciation * &ncrease in $alue of Exchange rate
+epreciation * +ecrease in $alue of Exchange rate
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Inflation
&f inflation in the (, is relati$ely lower than
elsewhere" then (, exports will ecome more competiti$e
and there will e an increase in demand for Pound )terling to
uy (, goods! Also foreign goods will e less competiti$e
and so (, citi-ens will uy less imports!
Therefore countries with lower inflation rates tend to see
an appreciation in the $alue of their currency!
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Interest Rates
&f (, interest rates rise relati$e to elsewhere" it will
ecome more attracti$e to deposit money in the (,! .ou
will get a etter rate of return from sa$ing in (, an's"
Therefore demand for )terling will rise! This is 'nown as
/hot money flows0 and is an important short run factor in
determining the $alue of a currency! Higher interest
rates cause an appreciation!
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Speculation
&f speculators elie$e the sterling will rise in the
future" they will demand more now to e ale to ma'e a
profit! This increase in demand will cause the $alue to rise!
Therefore mo$ements in the exchange rate do not always
reflect economic fundamentals" ut are often dri$en y the
sentiments of the financial mar'ets! For example" if
mar'ets see news which ma'es an interest rate increase
more li'ely" the $alue of the pound will proaly rise in
anticipation!
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Change in Competitiveness
&f British goods ecome more attracti$e and
competiti$e this will also cause the $alue of the
Exchange Rate to rise! This is important for determining
the long run $alue of the Pound! This is similar factor to
low inflation
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Relative strength of other currencies
&n 1232 and 1233" the $alue of the 4apanese .en and
)wiss Franc rose ecause mar'ets were worried aout all
the other major economies 5 () and E(! Therefore" despite
low interest rates and low growth in 4apan" the .en 'ept
appreciating!
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Balance of Payments
A deficit on the current account means that the $alue
of imports #of goods and ser$ices% is greater than the $alue
of exports! &f this is financed y a surplus on the financial 6
capital account then this is 7,! But a country who
struggles to attract enough capital inflows to finance a
current account deficit" will see a depreciation in the
currency! #For example current account deficit in () of
89 of :+P was one reason for depreciation of dollar in
122;<28%
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Government e!t
(nder some circumstances" the $alue of go$ernment det can
influence the exchange rate! &f mar'ets fear a go$ernment may default
on its det" then in$estors will sell their onds causing a fall in the $alue
of the exchange rate! For example" &celand det prolems in 122="
caused a rapid fall in the $alue of the &celandic currency!
For example" if mar'ets feared the () would default on its det" foreign
in$estors would sell their holdings of () onds! This would cause a fall
in the $alue of the dollar! )ee> () dollar and det
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Government Intervention
)ome go$ernments attempt to influence the $alue of
their currency! For example" ?hina has sought to 'eep its
currency under$alued to ma'e ?hinese exports more
competiti$e! They can do this y uying () dollar assets
which increases the $alue of the () dollar to ?hinese .uan
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Economic growth " recession
A recession may cause a depreciation in the
exchange rate ecause during a recession interest rates
usually fall! @owe$er" there is no hard and fast rule! &t
depends on se$eral factors!
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Forward Rate
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A rate applicable to a financial transaction that will
take place in the future. Forward rates are based on the
spot rate, adjusted for the cost of carry and refer to the rate
that will be used to deliver a currency, bond or commodity
at some future time. It may also refer to the rate fixed for a
future financial obligation, such as the interest rate on a
loan payment.
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&n forex" the forward rate specified in an agreement is a
contractual oligation that must e honored y the parties in$ol$ed! For
example" consider an American exporter with a large export order
pending for Europe" and underta'es to sell 32 million euros in
exchange for dollars at a rate of 3!AB euros per (!)! dollar in six
monthsC time! The exporter is oligated to deli$er 32 million euros at
the specified rate on the specified date" regardless of the status of the
export order or the exchange rate pre$ailing in the spot mar'et at that
time! Forward rates are widely used for hedging purposes in the
currency mar'ets" since currency forwards can e tailored for specific
reDuirements" unli'e futures" which ha$e fixed contract si-es and
expiry dates and therefore cannot e customi-ed!
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&n the context of onds" forward rates are calculated to
determine future $alues! For example" an in$estor can
purchase a one<year Treasury ill or uy a six<month ill and
roll it into another six<month ill once it matures! The in$estor
will e indifferent if they oth produce the same result! The
in$estor will 'now the spot rate for the six<month ill and the
one<year ond" ut he or she will not 'now the $alue of a six<
month ill that is purchased six months from now! :i$en these
two rates though" the forward rate on a six<month ill will e
the rate that eDuali-es the dollar return etween the two types
of in$estments mentioned earlier!
Quotation
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A !uotation is a business offer made by a seller to
an interested buyer to sell certain goods at specific prices and
on certain terms and conditions.
&t is a reply y the seller to the prospecti$e uyer! @ence" the
Duotation letter should e prepared carefully y the seller! &t should
contain information on all points mentioned in the inDuiry letter!
The seller should send the est possile Duotation so that it induces the
uyer to place an order ecause it is the asis on which the interested
uyer decides whether to uy or not!
The Duotation must e clear" courteous and concise
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3!+etails aout Duality of goods offered for sale!
1!+etails aout Duantity of goods offered for sale!
A!Type of Duotation!
E!)ale price per unit of the commodity!
B!Term of payment li'e ?ash or ?redit" trade discount" cash
discount and other allowances if any!
;!Time" mode and place of deli$ery!
8!+etails of duties" 7ctroi" etc!" payale!
=!+etails of pac'ing" laelling" insurance" etc!
F!Get price payale!
32!E and 7!E! #errors and omissions expected%
Contents of #uotation
,inds 6 Types of Quotations
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$% &oco Price #uotation
Loco means C7n the spotC! Therefore" the loco price refers
to the cost of goods at the factory or godown of the seller!
7nce the goods are out of the sellersC factory or
warehouse" all the expenses for carrying the goods from
the sellerCs warehouse to the uyerCs place are to e orne
y the uyer! This is the lowest price Duotation!
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(nder this Duotation" sellerCs responsiility is to
send the goods to the nearest railway station from his
warehouse! &t includes the cost of carriage of goods to the
station! )ince he deli$ers the goods upto the station" he
charges a little higher price! All further expenses on
goods such as freight" insurance" etc! ha$e to e orne y
the uyer!
'% Station Price #uotation
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Free 7n Rail #F7R% price Duotation co$ers the
expenses of carrying the goods to the railway station
nearest to seller plus the loading expenses" freight and
unloading expenses are to e orne y the uyer!
F7R price Duotation * )tation price Duotation H Loading
?harges
(% Free )n Rail *F)R+ Price #uotation
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?ost and Freight #? I F% price Duotation includes the cost of
the goods and all the expenses li'e carriage to the sellerCs
nearest station" doc' and loading charges and freight!
Expenses li'e insurance" unloading and cartage to the uyerCs
place are to e orne y the uyer!
? I F price Duotation * F7R price Duotation H Railway
Freight
,% Cost an- Freight *C . F+ Price #uotation
/% Cost Insurance an- Freight *CIF+ Price
#uotation
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There is a ris' in$ol$ed in transporting goods and this ris'
is co$ered y insurance! :enerally" the uyer pays
insurance charges ut if ?&F Duotation is mentioned then
the seller pays for the insurance charges along with other
pre$ious mentioned prices! )o" the price includes cost of
the goods plus carriage upto sellerCs nearest station"
loading" freight and insurance charges!
?&F price Duotation * ? I F price Duotation H &nsurance!
0% Franco Price #uotation
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Franco price Duotation is the highest price Duotation!
&nspite of eing the highest Duotation" uyers prefer
this Duotation ecause under this price" the goods are
deli$ered to the uyers at their door<step! The uyer is
relie$ed from the tension of transporting goods from
the sellerCs warehouse to his own warehouse!
Franco price Duotation * All expenses upto the uyerCs
warehouse!
1% Free 2longsi-e Ship *F2S+ Price #uotation
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Free Alongside )hip #FA)% price Duotation includes the cost of the
goods and all the expenses to deli$er the goods at the doc' nearest to
the seller! The uyer has to ear the expenses of loading" insurance"
freight and the customs duty" etc!" in addition to the cost of goods!
Though this Duotation is used in some countries" it is not in use in
&ndia!
FA) price Duotation * Loco price Duotation H cost of carriage of
goods upto the harour nearest to the seller!
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Free 7n Board #F7B% price Duotation is similar to F7R
in inland trade! This is normally used in foreign trade!
(nder F7B Duotation" the seller Duotes a price which
includes all the expenses incurred untill the goods are
actually deli$ered on oard the ship at the port of
shipment!
F7B price Duotation * cost of goods H expenses upto
goods on shipCs oard
3% Free )n Boar- *F)B+ Price #uotation
4% Cash 5ith )r-er *C5)+ Price #uotation
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&n ?ash Jith 7rder #?J7% price Duotation" the uyer
has to send cash along with the order" otherwise" the
order may not e executed!
$6% Cash )n elivery *C)+ Price #uotation
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&n ?ash 7n +eli$ery #?7+% price Duotation" the uyer has to
pay cash after recei$ing the deli$ery of the goods ordered y
him
Than' .ou
Than' .ou
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