a) Foreign Exchange Market: The foreign exchange market is the market where the national currencies of various countries are converted, exchanged or traded for one another.
b) Spot Market: The exchange rate that prevails in the spot market for foreign exchange is called Spot Rate.
c) Forward Market: A market in which foreign exchange is bought and sold for future delivery is known as forward market. Exchange rate that prevails in a forward contract for purchase or sale.
d) Managed Floating: This is the combination of fixed and flexible exchange rate. Under this, country manipulates the exchange rate to adjust the deficit in the balance of payment by following certain guidelines issued by I.M.F.
e) floating: If the countries manipulate the exchange rate without following the guidelines issued is called floating:
f) Deficit in BOP- If in current account of balance of payment (BOP), autonomous receipts are less than autonomous payments, then balance of payment (BOP) is said to be in deficit. It reflects disequilibrium in BOP.
g) Devaluation of a currency means reduction in the external value of a country’* currency as a conscious policy measure adopted by the Government of a country. In other words, we make our currency cheaper in terms of foreign currency. This makes our goods cheaper to foreign buyers and foreign goods costlier to our buyers. Hence exports increase, imports fall and the gap in trade balance becomes smaller. When a country suffers from continued deficit in its balance of payments, it may resort to devaluation of its currency with a view to encouraging exports and restricting imports and thus narrowing down or covering its trade gap and balance of payments deficit. It takes place in Fixed Exchange Rate System.
h) Depreciation of a currency means fall in value of domestic currency in terms of foreign currency. Example: if value of rupee in terms of US dollars falls, say from Rs. 45 to Rs. 50 per dollar, it will be a case of depreciation of Indian rupee because more rupees are required now to buy one US dollar. It occurs in Flexible Exchange Rate System
