How is currency exchange rate between two countries determined?
Dear Parag, the objective of exchange rate between nations is to make the people of these respective nations indifferent towards investment and market opportunities based differences so that arbitrage is controlled within a very short span. For example, if a parker pen costs $25 in United States and the same pen costs Rs 750 in India, inorder to keep the common man of U.S.A and India indifferent towards both markets, the exchange rate has to be $25=Rs 750 i.e $1=Rs30. This will discourage the Indian man from importing that pen from United States and at the same time discourage the American in U.S.A from exporting it to India. It is a well known fact that Macdonald Burger is often looked upon as a Benchmark for knowing the exchange rate difference between U.S.A and India because any change in the exchange rate between these two countries is immediately reflected in the price of Macdonald Burger in these two respective countries. Broadly speaking, it is the demand and supply for a curren
