Exchange Rate – Meaning & Types

Money is a commodity. Just like one apple costs ₹20, one Dollar costs ₹83. This price is the Exchange Rate.

1. Definition

"An Exchange Rate is the price of one currency expressed in terms of another currency."

• Example: USD/INR = 83.50 means 1 US Dollar = ₹83.50.
• Base Currency: The first currency (USD).
• Quote Currency: The second currency (INR).

2. Types of Exchange Rates (By Timing)

3. Currency Movements

• Appreciation: When a currency becomes stronger (price goes UP).
  • Example: old rate $1 = ₹80. New rate $1 = ₹70. Here Rupee has Appreciated (Dollar became cheap).
• Depreciation: When a currency becomes weaker (price goes DOWN).
  • Example: old rate $1 = ₹80. New rate $1 = ₹85. Here Rupee has Depreciated (Dollar became expensive).

4. Exam Notes: Writing the Answer

Question: "Define Exchange Rate and distinguish between Spot and Forward Rate." (5 Marks)

Answering Strategy:

1. Define: "Price of one currency...".
2. Distinguish: Use T-Table. Use "Immediate Delivery" vs "Future Delivery" as key difference.
3. Example: "If Mr. A buys dollars at counter, it is Spot Rate."

Quiz Time! 🎯