Explain in detail the process of determination of foreign exchange rate ?
Answers
Explanation:
Foreign Exchange Rate Determination
Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a unit of foreign currency. According to Purchasing Power Parity theory, the foreign exchange rate is determined by the relative purchasing powers of the two currencies.
Example: If a Mac Donald Burger costs $20 in the USA and Re 100 in India, then the exchange rate between India and the USA will be (100/20=5), 1 $ = 5 Re.
Forces Behind Exchange Rate Determination
Foreign Exchange is a price of one country currency in relation to other country currency, which like the price of any other commodity is determined by the demand and supply factors. The demand and supply of the foreign exchange rate come from the residents of the respective countries.