FACTORS OF FOREIGN EXCHANGE, SMART ZOMBI'S.

FACTORS OF FOREIGN EXCHANGE

Foreign exchange always involves two elements:

1: Mechanism of foreign payments.
2: Determination of exchange rate.

MECHANISM OF FOREIGN PAYMENTS:.
A third party always exits in the settlement of transaction between importer and exporter. This third party is either a bank or a discounting house. These two institution play an important role in the foreign trade as under.

1: The local bank appoints its representatives posted in banks in foreign countries through whom foreign payments are cleared.

2: The local bank maintains in foreign countries its own branches which are used in settling transactions relating to foreign exchange.

3: Some banks establish independent banks in foreign countries. These banks offer services to importers, exporters, and governments and help them in foreign payments. These foreign banks purchase foreign exchange in the local market in order to supply the exchange to the importers.


DETERMINATION OF EXCHANGE RATE:.

1: RATE FIXED BY GOVT.

The govt fixes its currency rate in terms of foreign currency. the rate remains fixed and stable over a long period of time. In the determination, the state keeps in view market forces, demand for local and foreign goods, and dictates of the WORLD BANK AND IMF.

2: FREE FLOAT:

In this method GOVT leaves its currency in the open market where it (currency) finds its genuine place. Market forces, like demand and supply, push the currency at a certain level which becomes its rate. The rate of exchange will be high if the currency has a good demand abroad and will be at low level if the demand is poor.

3: DIRTY FLOAT:.

It is the mixture of the above two methods. The GOVT uses its discretion up to a certain a level and the rest is left to open market forces in the determination of exchange rate.