An exchange rate is a rate at which one currency is exchanged for another. It is the value of one country currency in relation to another currency. The exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers.
The large global banks are involved in the interbank Forex markets through their external clients and own banks. External clients include other large banks, exporters, importers, multinational firms, central banks, and large non- bank financial institutions.
While dealing with external clients, market maker function is performed by the large banks. Where they quote prices upon demand to other parties in the interbank market, they also buy and sell currencies at their quoted prices.
These market makers have two primary activities. One is to continuously provide two- way quotes i.e. to provide a price at which they buy a currency and to provide a price at which they will sell a currency. The other activity is that the market maker actually buy and /or sell at the prices they quote, thus they offer firm prices into the market.
A market maker always provides the market with two prices, a price at which the market maker will buy a currency and a price at which they will sell a currency.
For example, EUR/USD: 1.1340 /1.1342. The first number quoted by the market maker is the market maker’s buy price for 1 unit of the base currency (1.1340). This is the bid quote, which is quoted to the exporter. The second quoted number is the market maker’s sell price for 1 unit of the base currency (1.1342). This is ask quote which is quoted to the importer.
The rate difference between ask price and bid price is called spread. The Bid is always the lower quote and ask is always the higher quote. Bid/ask spreads increases with exchange rate volatility and uncertainty. The Export Exchange Rate plays an important role for firms who export goods and import raw materials. When there is depreciation and exchange rates go down the exports will become cheaper and when the exchange rates go up the exports will become expensive.
For example, Exchange rate increases $1 = INR 70.86. Here, USD as appreciated and Rupee has become cheaper. Now, one can buy more goods from India than before for the same amount of dollars. As Indian goods and services have become relatively cheaper, the US imports increase and Indian export increases. In exchange rate terms, appreciation makes exports more expensive and reduces the competitiveness of exporting firms.
India exports over 7500 commodities and goods to more than 190 nations. Indian exports rose to USD 26.98 billion, 17.9 percent year-on-year in October 2018. This was mainly because India saw INR depreciating to its lowest levels during the month of October.
Therefore Business strategies of Export companies and movement entirely depend on the exchange rate of the country. It has a direct effect on global trading and production structure.
Read more about Export and Import Finance