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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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25.3 DETERMINATION OF EXCHANGE RATE IN SPOT MARKET

25.3.1 The Process of Determination

It is the interplay of the forces of demand and supply that determines the exchange rate between two currencies in a floating rate regime. The exchange rate between, say, the rupee and US dollar depends upon the demand for US dollars and the supply of US dollars in the Indian foreign exchange market. The demand for foreign currency comes from individuals and firms who have to make payments to foreigners in foreign currency mostly on account of the import of goods and services and purchase of securities. The supply of foreign exchange results from the receipt of foreign currency normally on account of export or sale of financial securities to foreigners.

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