IEcoS (Economic Services) Indian Economics Foreign Trade-Exchange Rate Terms and Persons (Page 4 of 8)

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Flexible or Floating Exchange Rate System

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Here, the exchange rate is determined in the foreign exchange market by the operation of market forces. Demand and supply of foreign currency is the main market forces that determine the exchange rate. The central bank never intervenes in the foreign exchange market to stabilise the exchange rate. Presently, most of the advanced countries are having floating ERS. Under floating exchange rate system, the currency movements are appreciation and depreciation. Appreciation is increase in the external value of the domestic currency due to the operation of the market forces. Depreciation is decrease in the external value of the domestic currency.

Foreign Exchange Risk

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Foreign-exchange risk is the risk that an asset or investment denominated in a foreign currency will lose value as a result of unfavorable exchange rate fluctuations. The exchange rate fluctuations between the investment՚s foreign currency and the investment holder՚s domestic currency may cause this foreign exchange risk.

The reason for foreign exchange rate risks is that exchange rates are not predictable. Any movement of it may cause gain or losses for holders of foreign currency denominated assets.