Q.24. What are the causes of fluctuation in
the rate of exchange of a country?
The rate of exchange fluctuates in
the market due to interplay of demand and supply of currency of a particular country.
This is the result of some of the following transactions.
BALANCE OF
TRADE
The main reason for fluctuations in
the rate of exchange of the currency is the value of imports and exports of a
country. If the value of imports exceeds the value of exports the rate of
exchange will lend downwards and vice versa.
FOREIGN
INVESTMENT
Foreign capital investment in a
country necessities the payment of dividends or interest to the investing
countries. If the capital absorbing country is not in a position to pay such
claims in foreign currency, the rate of exchange of that country will
definitely fall down.
SERVICE
CHARGES
Freight and Insurance expenses also
fluctuates the rate of exchange of a country. If the importing country does not
have her own shipping companies the transportation charges are to be paid to
foreign ships. So the insurance premium in case is to be paid to foreign
companies. This creates a demand of foreign currency and if the supply is
limited the rate of exchange will fall.
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