What causes Demand of Foreign Exchange?

Transcript

What Causes Demand for Foreign Exchange? (Why do we need Foreign Currency like Dollars) For Importing Goods Foreign Country Goods Dollars India For Purchasing Assets Land/Shares in USA Purchase Dollars India For Sending Gifts (Unilateral Transfers) NRI India Dollars Tourism Foreign Tour Dollars India Foreign Exchange Demand For Speculation Suppose Dollar Rate is 75/$ A speculator expects it to become 80/$ in future So he will buy foreign exchange today and sell in future Buying today increases demand for Foreign exchange Dollar Rate Current Expected in future 75/$ 80/$ Speculator purchase $1000 and sells them in future Sales 80000 Purchase 75000 Profit 5000 This Purchase increase Demand for Foreign Exchange Relation between Foreign Exchange Rate & Demand Imported Car Cost $ 100,000 Year 2021 Suppose Exchange Rate is Rs70 What is Cost of Car in Rupees? Cost = 100,000*70 = Rs 70,00,000 Price is less More Cars sold More Demand Year 2022 Suppose Exchange Rate increases to Rs 80. What is Cost of Car in Rupees? Cost = 100,000*80 = Rs 80,00,000 Price is more Less Cars will be sold Less Demand When Exchange Rate increases Demand of Foreign Exchange Decreases Schedule Representation - Foreign Exchange Rate and Foreign Exchange Demand Foreign Exchange Rate 70 80 90 Foreign Exchange Demand 500 400 300 Increase in Foreign Exchange Rate Leads to Decrease in Foreign Exchange Demand Hence, Foreign Exchange Rate and Demand are inversely proportional Graph Representation Foreign Exchange Rate and Demand Foreign Exchange Demand On X Axis, we show Foreign Exchange Rate On Y Axis, we show Foreign Exchange Demand As the Rate increases, Demand falls Hence, Demand Curve has Downward Slope