Chapter 6 Part 1 - Foreign Exchange Rates

Chapter 6 Part 2 - Balance of Payment →
Economics Class 12
Macroeconomics

How does Speculation affects Exchange Rates?

Last updated at April 16, 2024 by

People Speculate in Foreign Exchange to earn Profits

Example 1

Suppose Exchange Rate of Dollar is currently Rs 70 per Dollar

Person feel that it will rise in future to Rs 80 per Dollar

So they will Purchase Dollar today @ Rs 70 and sell it later at Rs 80

So there is Increase in Demand of Foreign Currency

 

Example 2

Suppose Exchange Rate of Dollar is currently Rs 70 per Dollar

Person feel that it will fall in future to Rs 60 per Dollar

So they will Sell Dollar today @ Rs 70 and purchase it later at Rs 60

Selling now decreases demand of foreign exchange

So there is decrease in demand of foreign currency

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Transcript

Effect of Speculation on Exchange Rates Exchange Rate increase Expected Current Exchange Rate =Rs 70 per $ Speculator expects it to become Rs 80 per $ So, speculator Purchase dollar now & sell in future Sales 80 Purchase 70 Profit 10 Purchasing now increases demand for foreign currency Exchange Rate Decrease Expected Current Exchange Rate =Rs 70 per $ Speculator expects it to become Rs 60 per $ So, speculator Sell dollar now & buy in future Sales 70 Purchase 60 Profit 10 Selling now decreases demand for foreign currency

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CA Maninder Singh is a Chartered Accountant for the past 14 years and a teacher from the past 18 years. He teaches Science, Economics, Accounting and English at Teachoo