Question

1. Pick an institution involved in the foreign exchange market. In what ways does this institution contribute to foreign exchange? Pick one challenge this institution faces in terms of foreign exchange.

2. Pick a currency and find its current exchange rate in terms of the US Dollar. What factors go into this exchange rate?

1. Think of an event that could cause this exchange rate to change. How might it change?

Answer 1

Foreign exchange is the medium for converting one countries currencyinto other countries currency.Every economy facilitates foreign exchange.

• There are many institutions which facilitates foriegn exchange in an economy.These may be the government,commercial banks,investment banks or central banks etc.
• Now lets see how commercial banks play role in foreign exchange-

1. Commercial banks ties up with international banks and foreign banks for services.
2. They provide service for converting foreign currency to native currency or native to foreign currency.
3. They also provides facilities like travelers cheque etc which can be used to` withdraw money in other country..
4. They helps bussiness oraganisation in international bussiness transaction by providing service such as letter of credit,documentary collection etc,

Now when we look the exchange value of 1 kuwait Dinar into US dollars we get 3.27$ for 1 kuwait Dinar (as on 1/0/2020)

There are various factors which effect the foreign exchange rate,some of them are:

1. Government debt
2. Inflation rate.
3. Countries balance of payment.
4. Political stability of economy.

• If look how an government debt or nation debt can affect foreign exchange rate, we can say if an economy has a high debt which cant be concieved within its economic perfomance then it may likely speculate to have negative impact in its foreign exchange rate.We cant always say high debt will cause negative impact on exchange rate. If the economy has the power to outpass one huge debt,then it will not affect the exchange rate of the country,