Factors Affecting Exchange Rate

Forward Rate

Type of Quotation

Presented By Aji R Lal

Factors which

influence the Exchange Rate

Exchange rates are determined by supply and demand.

For example, if there was greater demand for U S goods then

there would tend to be an appreciation (increase in value) of

the $. If markets were worried about the future of the US

economy, they would tend to sell $, leading to a fall in the

value of the $

2

Appreciation = Increase in value of Exchange rate

Depreciation = Decrease in value of Exchange rate

Inflation

If inflation in the UK is relatively lower than

elsewhere, then UK exports will become more competitive

and there will be an increase in demand for Pound Sterling to

buy UK goods. Also foreign goods will be less competitive

and so UK citizens will buy less imports.

Therefore countries with lower inflation rates tend to see

an appreciation in the value of their currency.

3

Interest Rates

If UK interest rates rise relative to elsewhere, it will

become more attractive to deposit money in the UK. You

will get a better rate of return from saving in UK banks,

Therefore demand for Sterling will rise. This is known as

“hot money flows” and is an important short run factor in

determining the value of a currency. Higher interest

rates cause an appreciation.

4

Speculation

If speculators believe the sterling will rise in the future,

they will demand more now to be able to make a profit. This

increase in demand will cause the value to rise. Therefore

movements in the exchange rate do not always reflect

economic fundamentals, but are often driven by the

sentiments of the financial markets.

For example, if markets see news which makes an interest

rate increase more likely, the value of the pound will probably

rise in anticipation.

5

Change in Competitiveness

If British goods become more attractive and competitive

this will also cause the value of the Exchange Rate to rise.

This is important for determining the long run value of the

Pound. This is similar factor to low inflation

6

Relative strength of other Currencies

In 2010 and 2011, the value of the Japanese Yen and

Swiss Franc rose because markets were worried about all

the other major economies – US and EU. Therefore,

despite low interest rates and low growth in Japan, the Yen

kept appreciating.

7

Balance of Payments

A deficit on the current account means that the value

of imports (of goods and services) is greater than the value

of exports. If this is financed by a surplus on the financial /

capital account then this is OK. But a country who

struggles to attract enough capital inflows to finance a

current account deficit, will see a depreciation in the

currency.

8

Current account deficit

in US of 7% of GDP was

one reason for

depreciation of $ in

2006-07

Government Debt

Under some circumstances, the value of government

debt can influence the exchange rate. If markets fear a

government may default on its debt, then investors will sell

their bonds causing a fall in the value of the exchange rate.

For example, Iceland debt problems in 2008, caused a rapid

fall in the value of the Icelandic currency.

9

if markets feared the US would default on its debt, foreign

investors would sell their holdings of US bonds. This

would cause a fall in the value of the dollar.

Government Intervention

Some governments attempt to influence the value of

their currency.

For example, China has sought to keep its currency

undervalued to make Chinese exports more competitive.

They can do this by buying US dollar assets which increases

the value of the US dollar to Chinese Yuan

10

Economic Growth / Recession

A recession may cause a depreciation

in the exchange rate because during a

recession interest rates usually fall.

However, there is no hard and fast rule. It

depends on several factors.

11

Forward Rate

12

“A rate applicable to a financial transaction that will

take place in the future. Forward rates are based on the

spot rate, adjusted for the cost of carry and refer to the rate

that will be used to deliver a currency, bond or commodity

at some future time. It may also refer to the rate fixed for a

future financial obligation, such as the interest rate on a

loan payment.”

Quotation

13

“A Quotation is a business offer made by a seller to

an interested buyer to sell certain goods at specific prices and

on certain terms and conditions”.

It is a reply by the seller to the prospective buyer. Hence, the

quotation letter should be prepared carefully by the seller. It should

contain information on all points mentioned in the inquiry letter.

The seller should send the best possible quotation so that it induces the

buyer to place an order because it is the basis on which the interested

buyer decides whether to buy or not.

The quotation must be clear, courteous and concise

14

1.Details about quality of goods offered for sale.

2.Details about quantity of goods offered for sale.

3.Type of quotation.

4.Sale price per unit of the commodity.

5.Term of payment like Cash or Credit, trade discount, cash

discount and other allowances if any.

6.Time, mode and place of delivery.

7.Details of duties, Octroi, etc., payable.

8.Details of packing, labelling, insurance, etc.

9.Net price payable.

10.E and O.E. (errors and omissions expected)

Contents of Quotation

A duty levied in some

countries on various

goods entering a town or

city.

Kinds / Types of Quotations

1. Loco Price Quotation

16

Loco means 'On the spot'. Therefore, the loco price

refers to the cost of goods at the factory or godown of the

seller. Once the goods are out of the sellers' factory or

warehouse, all the expenses for carrying the goods from

the seller's warehouse to the buyer's place are to be borne

by the buyer. This is the lowest price quotation.

17

Under this quotation, seller's responsibility is to

send the goods to the nearest railway station from his

warehouse. It includes the cost of carriage of goods to the

station. Since he delivers the goods up to the station, he

charges a little higher price. All further expenses on

goods such as freight, insurance, etc. have to be borne by

the buyer.

2. Station Price Quotation

18

Free On Rail (FOR) price quotation covers the expenses

of carrying the goods to the railway station nearest to seller

plus the loading expenses, freight and unloading expenses are

to be borne by the buyer.

FOR price quotation = Station price quotation + Loading Charges

3. Free On Rail (FOR) Price Quotation

19

Cost and Freight (C & F) price quotation includes the cost of

the goods and all the expenses like carriage to the seller's

nearest station, dock and loading charges and freight.

Expenses like insurance, unloading and cartage to the buyer's

place are to be borne by the buyer.

C & F price quotation = FOR price quotation + Railway Freight

4. Cost and Freight (C & F) Price Quotation

5. Cost Insurance and Freight (CIF) Price

Quotation

20

There is a risk involved in transporting goods and this

risk is covered by insurance. Generally, the buyer pays

insurance charges but if CIF quotation is mentioned then the

seller pays for the insurance charges along with other

previous mentioned prices. So, the price includes cost of the

goods plus carriage up to seller's nearest station, loading,

freight and insurance charges.

CIF price quotation = C & F price quotation + Insurance.

6. Franco Price Quotation

21

Franco price quotation is the highest price quotation.

In spite of being the highest quotation, buyers prefer this

quotation because under this price, the goods are delivered to

the buyers at their door-step. The buyer is relieved from the

tension of transporting goods from the seller's warehouse to

his own warehouse.

Franco price quotation = All expenses up to the buyer's warehouse.

7. Free Alongside Ship (FAS) Price Quotation

22

Free Alongside Ship (FAS) price quotation includes the cost

of the goods and all the expenses to deliver the goods at the dock

nearest to the seller. The buyer has to bear the expenses of loading,

insurance, freight and the customs duty, etc., in addition to the cost of

goods. Though this quotation is used in some countries, it is not in

use in India.

FAS price quotation = Loco price quotation + cost of carriage of

goods up to the harbor nearest to the seller.

23

Free On Board (FOB) price quotation is similar to FOR

in inland trade. This is normally used in foreign trade. Under

FOB quotation, the seller quotes a price which includes all the

expenses incurred until the goods are actually delivered on

board the ship at the port of shipment.

FOB price quotation = cost of goods + expenses up to goods on ship's board

8. Free On Board (FOB) Price Quotation

9. Cash With Order (CWO) Price Quotation

24

In Cash With Order (CWO) price quotation, the

buyer has to send cash along with the order, otherwise,

the order may not be executed.

10. Cash On Delivery (COD) Price Quotation

25

In Cash On Delivery (COD) price quotation, the buyer

has to pay cash after receiving the delivery of the goods

ordered by him

26