Question

6) Discuss (and, if possible, give contemporary examples of) exchange-rate quotations, in terms of spot rates, forward rates, real exchange rates, effective exchange rates! What happens when a currency depreciates against another currency?

Answer 1

This is my answer

Spot rate: A spot contract deals with buying and selling of a commodity for payment and settlement on the spot date. The settlement price is called the spot rate.

Forward rate: In forward exchange market, contract is greed now and delivery and payment is done in future date but at a pre-determined rate. The settlement price here is referred to as forward exchange rate.

Real Exchange rate:  Real exchange rate is ratio of foreign prices and domestic prices measured in same currency. It ensures country's competitiveness in international trade.

Effective exchange rate: Effective exchange rate is a measure of strength of one currency in relation to other currencies in the international money market.

When a currency depreciates, it reduces value of a country's currency with respect to one or more foreign reference currencies.

A country's currency when depreciates makes it expensive to buy foreign currency. There would be increased pressure on the home price level as the foreign-goods become more expensive. In contrast, purchases of home country goods by foreigners become less expensive since the home country currency has become less expensive to obtain.

Thank you..