Question 32. What do you mean by foreign exchange rate ?
Answer 32. FOREIGN EXCHANGE : It is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion of currencies is done by banks which are authorized to deal in foreign exchange . These banks maintain stock of foreign currencies in the form of balance with banks abroad .
Foreign trade is transacted either in the currency of the exporter's currency or that of the importer's currency or that of a third country , acceptable to both exporter and the importer. Foreign exchange is the concomitant of foreign trade.
EXCHANGE RATE : This is also called 'Rate of exchange' . For undertaking a foreign exchange transaction , one must know the rate in which the conversion between the two currencies concerned can be affected. If a correct rate is not applied to the transaction, it may mean a loss either to the bank or to the customer.
The rate at which one currency is converted into another currency is called the EXCHANGE RATE , between the currencies concerned.
For instance , if 43 rupees are exchangeable for one U.S dollars, then the rate of exchange between rupee and dollar is expressed as
1 U.S. Dollar = Rs. 43.
This is equivalent to say that Rs. 100= 2.3256 Dollars.
The rate of exchange for a currency is known from the quotation in the foreign exchange market. The foreign exchange market comprises of banks operating at a financial centre and dealing in foreign exchange. As in any commodity or stock market , the rates in the foreign exchange market are determined by the intersection of the forces of demand and supply . These rates of exchange keep on changing frequently.