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Some Important Terms in regards to Forex

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Some Important Terms in regards to Forex
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Sunanda K. Chavan
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Some Important Terms in regards to Forex - October 8th, 2010

Some Important Terms

1. Fixed Exchange Rate System
In a fixed exchange rate system foreign central banks stand ready to buy and sell their currencies at a fixed price in terms of dollars.

2. Intervention
Intervention is the buying or selling of foreign exchange by the central bank. Foreign exchange market intervention occurs when a government buys and sells foreign exchange in an attempt to influence the exchange rate.

3. Flexible Exchange Rate System
In a flexible exchange rate system, the central banks allow the exchange rate to adjust to equate the supply and demand for foreign currency. The terms flexible and floating rates are used interchangeably.

In a system of Clean Floating Rate, Central Banks stand aside completely and allow exchange rates to be freely determined in the foreign exchange markets.
Under a Managed or a Dirty floating rate, Central banks intervene to buy and sell foreign currencies in attempts to influence exchange rates.

4. Hybrid exchange rate system

It is system, which involves some currencies, whose values float freely, some currencies whose values are determined by a combination of government intervention and the market and some that are pegged or fixed to one currency or a group of currencies.

5. Devaluation

Devaluation takes place when the price of foreign currencies under a fixed rate regime is increased by official action. The outfall of this is that the foreigners pay less for the devalued currency and the residents of the devaluing currency pay more for foreign currencies.
For e.g. Prior to devaluation in1991, the rate of exchange was around Rs. 21 per US$. After devaluation it came to about Rs. 26 per US$. Since then the value of rupee has fallen further. In February 2002, it was Rs. 48 per US $.

Main objectives of devaluation
Overcoming 1991 crisis.

• Acute shortage of foreign exchange reserves to meet the payment obligations, both for imports and servicing of foreign debts.
• Low rating of the country in respect of its ability to meet its debt obligations.
• Decline in foreign exchange reserves due to
(a) Rapidly falling exports
(b) Drastic reduction in the capital inflows from NRIs
(c) Sharp shrinkage of remittances from the Indians working abroad.

6. Depreciation

A change in price of foreign exchange under flexible exchange rates is referred to as currency depreciation or appreciation. A currency depreciates when, under floating rates, it becomes less expensive in terms of foreign currencies. The reverse results in appreciation.

If the exchange rate falls, the domestic currency is worth more; it costs fewer domestic currencies to buy a unit of foreign currency.

7. Balance of payments

The development in the external sector is recorded in a format called balance of payment. This is a periodic statement of the money value of all the transactions a country have with foreign countries and international institutions.
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Re: Some Important Terms in regards to Forex
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Rose Marry
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Re: Some Important Terms in regards to Forex - April 15th, 2016

Quote:
Originally Posted by sunandaC View Post
Some Important Terms

1. Fixed Exchange Rate System
In a fixed exchange rate system foreign central banks stand ready to buy and sell their currencies at a fixed price in terms of dollars.

2. Intervention
Intervention is the buying or selling of foreign exchange by the central bank. Foreign exchange market intervention occurs when a government buys and sells foreign exchange in an attempt to influence the exchange rate.

3. Flexible Exchange Rate System
In a flexible exchange rate system, the central banks allow the exchange rate to adjust to equate the supply and demand for foreign currency. The terms flexible and floating rates are used interchangeably.

In a system of Clean Floating Rate, Central Banks stand aside completely and allow exchange rates to be freely determined in the foreign exchange markets.
Under a Managed or a Dirty floating rate, Central banks intervene to buy and sell foreign currencies in attempts to influence exchange rates.

4. Hybrid exchange rate system

It is system, which involves some currencies, whose values float freely, some currencies whose values are determined by a combination of government intervention and the market and some that are pegged or fixed to one currency or a group of currencies.

5. Devaluation

Devaluation takes place when the price of foreign currencies under a fixed rate regime is increased by official action. The outfall of this is that the foreigners pay less for the devalued currency and the residents of the devaluing currency pay more for foreign currencies.
For e.g. Prior to devaluation in1991, the rate of exchange was around Rs. 21 per US$. After devaluation it came to about Rs. 26 per US$. Since then the value of rupee has fallen further. In February 2002, it was Rs. 48 per US $.

Main objectives of devaluation
Overcoming 1991 crisis.

• Acute shortage of foreign exchange reserves to meet the payment obligations, both for imports and servicing of foreign debts.
• Low rating of the country in respect of its ability to meet its debt obligations.
• Decline in foreign exchange reserves due to
(a) Rapidly falling exports
(b) Drastic reduction in the capital inflows from NRIs
(c) Sharp shrinkage of remittances from the Indians working abroad.

6. Depreciation

A change in price of foreign exchange under flexible exchange rates is referred to as currency depreciation or appreciation. A currency depreciates when, under floating rates, it becomes less expensive in terms of foreign currencies. The reverse results in appreciation.

If the exchange rate falls, the domestic currency is worth more; it costs fewer domestic currencies to buy a unit of foreign currency.

7. Balance of payments

The development in the external sector is recorded in a format called balance of payment. This is a periodic statement of the money value of all the transactions a country have with foreign countries and international institutions.
Nice Topic Sunanda,

I am also uploading a document which will give more detailed explanation on Investopedia’s Top 300 Forex Terms.
Attached Files
File Type: pdf Investopedia’s Top 300 Forex Terms.pdf (1.14 MB, 0 views)
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