Question

What are the various methods to determine the rate of foreign Exchange? Describe Mint Par Rate of Exchange.

Answer 1

Suppose there are two countries, one having a gold standard, say, Britain, and the other has a silver standard, say, China. How will the rate of exchange between the British pound and Chinese dollar be determined? In order to clear their dues, the Chinese importers wish to buy the British currency, which is gold, with the Chinese dollars, which is silver. Hence, the rate in Peking will depend on the price of gold in terms of silver. In the same manner, in London the rate of exchange will depend on the price of silver in terms of gold. This system also does not prevail anywhere.