Exchange Rates

Proposed as a Task Course

English for Economic

Lecturer:
Nur Fauzilah, S.PdI, M.Pd

Arranged by :
Fariz Erdinata (G94217090)
Elsavira Nurizzah (G94217086)
Iqda Nur Afriliya (G04217027)
Nurchamidah (G94217115)
Rosidah Laila N. A. (G94217121)

SHARIA ECONOMIC DEPARTEMENT

ECONOMICS AND ISLAMIC BUSINESS FACULTY
ISLAMIC STATE UNIVERSITY OF SUNAN AMPEL
SURABAYA
2019
 FOREWORD
Alhamdulillah, thank you, the writer gives to Allah SWT who still
gives a breath of life, so that the writer can finish making a paper entitled
"Exchange Rates" in a timely manner. Not forgetting prayer and greetings
are always poured out on the Prophet Muhammad, who is the greatest
inspiration in all his example. Not forgetting the author thanked to the
lecturer of English for Economic for providing direction and guidance in
making this paper, parents who always support the smooth running of our
assignments, and group members who are always in harmony with each
other and consistent in completing this task .
Finally, the author expresses his gratitude for his attention to this
paper, and the author hopes that this paper will be useful for the team of
writers in particular and dear readers in general. There is no ivory that is
not cracked, that's the way this paper is. With all humility, constructive
suggestions and criticisms the author expects from readers to increase the
making of papers on other assignments and in the future.

Surabaya, April 7 2019

Author

i
 TABLE OF CONTENTS

TITLE PAGES
FOREWORD ........................................................................................................................ i
TABLE OF CONTENTS ..................................................................................................... ii
CHAPTER I ......................................................................................................................... 1
INTRODUCTION ................................................................................................................ 1
A. Background of Problem ........................................................................................ 1
B. Formulation of Problem ....................................................................................... 1
C. Objective of the Research ................................................................................... 1
CHAPTER II ........................................................................................................................ 2
DISCUSSION ....................................................................................................................... 2
A. Definition and Type of Exchange Rates ........................................................... 2
B. System of Exchange Rates ................................................................................... 8
C. Factors That Affect Exchange Rates ................................................................. 8
D. Case: The Journey of Indonesian Rupiah ...................................................... 12
CHAPTER III ..................................................................................................................... 14
CLOSING........................................................................................................................... 14
A. Conclusion ............................................................................................................. 14
B. Suggestion.............................................................................................................. 14
BIBLIOGRAPHY ............................................................................................................... 15

ii
 CHAPTER I

INTRODUCTION
A. Background of Problem
The system of foreign exchange rates is determined by market
mechanisms, namely the strength of market demand and supply and
various ways of regulating government interference in this field. The
pattern of exchange rate behavior depends on the monetary system in
effect.

The pair of domestic and international economic problems faced

and the right policies taken for each issue may be relevant and / or may
conflict. In this paper we will discuss more about exchange rates. Each
country has its own currency and that currency shows the value of its
goods. Likewise, the international monetary system refers to institutions
where payment for cross-country transactions is carried out. This system
determines how foreign exchange rates are determined and how the
government can influence the exchange rate. (Blanchard, 2006)

B. Formulation of Problem
1. What is the definition and type of exchange rates?
2. How about the exchange rates system?
3. What factor that affect exchange rates?
4. How has the Indonesian Rupiah journey for past 20 years?

C. Objective of the Research

1. To understand the definition and type of exchange rates
2. To understand the system of exchange rates
3. To understand factor that affect exchange rates
4. To understand Indonesian Rupiah Journey for past 20 years

1
 CHAPTER II

DISCUSSION
A. Definition and Type of Exchange Rates
1. Definition of Exchange Rate
An Exchange rate is the price of one country’s currency in
terms of another country’s currency. Exchange rates play a role in
spending decisions because they enable us to translate different
countries’ prices into comparable terms. All else equal. A
depresiation of country’s currency againtst foreign currencies (a
rise in the home currency prices of foreign currencies) makes its
exports cheaper and its imports more expensive. An appresiation of
its currency (a fall in the home curency prices of foreign
currencues) makes its exports more expensive and its imports
cheaper (Krugman, 1977).
In finance, an exchange rate is the rate at which one
currency will be exchanged for another. It is also regarded as the
value of one country’s currency in relation to another currency. For
example, an interbank exchange rate of 114 Japanese yen to the
United States dollar means that ¥114 will be exchanged for each
US$1 or that US$1 will be exchanged for each ¥114. In this case it
is said that the price of a dollar in relation to yen is ¥114, or
equivalently that the price of a yen in relation to dollars is $1/114
(Goldfield, 1966).
Exchange rates are determined in the foreign exchange
market, which is open to a wide range of different types of buyers
and sellers, and where currency trading is continuous: 24 hours a
day except weekends, i.e. trading from 20:15 GMT on Sunday until
22:00 GMT Friday. The spot exchange rate refers to the current
exchange rate. The forward exchange rate refers to an exchange

2
rate that is quoted and traded today but for delivery and payment
on a specific future date.
In the retail currency exchange market, different buying
and selling rates will be quoted by money dealers. Most trades are
to or from the local currency. The buying rate is the rate at which
money dealers will buy foreign currency, and the selling rate is the
rate at which they will sell that currency. The quoted rates will
incorporate an allowance for a dealer's margin (or profit) in trading,
or else the margin may be recovered in the form of a commission
or in some other way. Different rates may also be quoted for cash,
a documentary form or electronically. The higher rate on
documentary transactions has been justified as compensating for
the additional time and cost of clearing the document. On the other
hand, cash is available for resale immediately, but brings security,
storage, and transportation costs, and the cost of tying up capital
in a stock of banknote.
The United States exports and imports a staggering volume
of goods and services. Although we trade with nearly 200 nations
around the world, we seldom give much thought to where imports
come from and much less to how we acquire them. Most of the
time, all we want to know is which products are available and at
what price (Schiller, 2006).
Suppose you want to buy a Magnavox DVD player. You don’t
have to know that Magnavox players are produced by the Dutch
company Philips Electronics. And you certainly don’t have to fly to
the Netherlands to pick it up. All you have to do is drive to the
nearest electronics store; or you can just “click and buy” at the
Internet’s virtual mall.
But you may wonder how the purchase of an imported
product was so simple. Dutch companies sell their products in

3
euros, the currency of Europe. But you purchase the DVD player in
dollars. How is such an exchange possible?
There’s a chain of distribution between your dollar
purchase in the United States and the euro-denominated sale in the
Netherlands. Somewhere along that chain someone has to convert
your dollars into euros. The critical question for everybody
concerned is how many euros we can get for our dollars-that is,
what the exchange rate is. If we can get two euros for every dollar,
the exchange rate is 2 euros = 1 dollar. Alternatively, we could note
that the price of a euro is 50 US. cents when the exchange rate is
2 to 1. Thus, an exchange rate is the price of one currency in terms
of another (Schiller, 2006).
Most exchange rates are determined in foreign-exchange
markets. Stop thinking of money as some sort of magical substance,
and instead view it as a useful commod. ity that facilitates market
exchanges. From that perspective, an exchange rate~the price of
money-is subject to the same influences that determine all market
prices; demand and supply.
When Daimler-Benz bought Chrysler in 1998, it paid $36
billion. When the Sony Corporation bought Columbia Pictures, it
also needed dollars-over 3 billion of them! In both cases, the
objective of the foreign investor was to acquire an American
business. To attain their objectives, however, the buyers first had
to buy dollars. The German and Japanese buyers had to exchange
their own currency for American dollars.
Canadian tourists also need American dollars. Few
American restaurants or hotels accept Canadian currency as
payment for goods and services; they want to be paid in US. dollars.
Accordingly, Canadian tourists must buy American dollars if they
want to see the United States.

4
 Europeans love iPods. The Apple Corporation, however,
wants to be paid in US. dollars. Hence, European consumers must
exchange their currencies for US. dollars if they want an iPod.
Individual consumers can spend euros at their local electronics
store. When they do so, however, they’re initiating a series of
market transactions that will end when Apple Corporation gets paid
in US. dollars. In this case, some intermediary exchanges the
European currency for American dollars.
Some foreign investors also buy us. dollars for speculative
purposes. When the ruble collapsed, Russians feared that the value
of the ruble would drop further and preferred to hold US. dollars.
Barclay’s Bank also speculates in dollars on occasions when it fears
that the value of the British pound will drop. All these motivations
give rise to a demand for US. dollars. Specifically, the market
demand for US. dollars originates in (Schiller, 2006).
a. Foreign demand for American exports (including tourism).
b. Foreign demand for American investments.
c. Speculation.
2. Type of Exchange Rate
From the perspective of bank foreign exchange trading
a. Buying rate: Also known as the purchase price, it is the price
used by the foreign exchange bank to buy foreign currency from
the customer. In general, the exchange rate where the foreign
currency is converted to a smaller number of domestic
currencies is the buying rate, which indicates how much the
country's currency is required to buy a certain amount of foreign
exchange.
b. Selling rate: Also known as the foreign exchange selling price, it
refers to the exchange rate used by the bank to sell foreign
exchange to customers. It indicates how much the country’s

5
 currency needs to be recovered if the bank sells a certain
amount of foreign exchange.
c. Middle rate: The average of the bid price and the ask price.
Commonly used in newspapers, magazines or economic analysis.
According to the length of delivery after foreign exchange
transactions
1) Spot exchange rate: Refers to the exchange rate of spot foreign
exchange transactions. That is, after the foreign exchange
transaction is completed, the exchange rate in Delivery within
two working days. The exchange rate that is generally listed on
the foreign exchange market is generally referred to as the spot
exchange rate unless it specifically indicates the forward
exchange rate.
2) Forward exchange rate: To be delivered in a certain period of
time in the future, but beforehand, the buyer and the seller
will enter into a contract to reach an agreement. When the
delivery date is reached, both parties to the agreement will
deliver the transaction at the exchange rate and amount of the
reservation. Forward foreign exchange trading is an
appointment-based transaction, which is due to the different
time the foreign exchange purchaser needs for foreign
exchange funds and the introduction of foreign exchange risk.
The forward exchange rate is based on the spot exchange rate,
which is represented by the “premium”, “discount”, and
“parity” of the spot exchange rate.
According to the method of setting the exchange rate:
1) Basic rate: Usually choose a key convertible currency that is
the most commonly used in international economic
transactions and accounts for the largest proportion of foreign
exchange reserves. Compare it with the currency of the
country and set the exchange rate. This exchange rate is the

6
 basic exchange rate. The key currency generally refers to a
world currency, which is widely used for pricing, settlement,
reserve currency, freely convertible, and internationally
accepted currency.
2) Cross rate: After the basic exchange rate is worked out, the
exchange rate of the local currency against other foreign
currencies can be calculated through the basic exchange rate.
The resulting exchange rate is the cross exchange rate.
When there is some delay between the bank payung
customer and itself getting paid, as when the bank discounts export
bills. Various margins are subtracted from the TT buying rates.
Similarlt, when the bank has to handle documents apart from
effecting payment, margins are added to the TT selling rates (Dun,
2007).
Buying Rates, Exporteer draw bills of exchange on their
foreign customers. They can sell these bills to an AD for immediate
payment. The AD buys the bill and collects payment the drawee on
presentation. The delay involved is only the transit period. Time or
usuance bills give time to the importer to settle the payment. i.e.,
the exporter agrees to give credit to importer. In such cases, the
delay involved is transit period plus the usance or credit period. In
addition to the exchange margin to cover the cost and provide
profit. The AD will also adjust the rate for forward discount or
premium.
Selling rates, when an importer requests the bank to make
a payment to a foreign supllier against a bill drwan on the importer,
the bank has to handle documents related to transaction. For this
the bank adds another margin over the TT selling rate to arrive at
bill selling rate (Dun, 2007).

7
B. System of Exchange Rates
1. Floating Exchange Rate
The floating exchange rate system is also called the flexible
exchange rate system. In this system, the monetary authority did
not interfere at all towards determining currency rates. So the
exchange rate always functions for the market clear up.
2. Mixed Exchange rate system
The mixed exchange rate system can be seen as a form of
compromise from debate over which system to use, whether the
system of exchange rates is fixed or not floating rate system
3. Fixed Exchange Rate
Fixed exchange rate is an exchange rate system where the
monetary authority is the highest a country (Central Bank) sets a
value domestic exchange with other countries set at a certain level
without seeing supply and demand activities on the market money,

C. Factors That Affect Exchange Rates

1. Depreciation and Appreciation
An exchange rate determined by market forces can, and
aften does, change daily like stock and bond price. When the dollar
price of pounds rises, for example, from $2 = £1 to $3 = £1, the
dollar has depreciated relativ to the pound (and the pound has
appreciated relative to the dollar). When a currency depreciates,
more units of it (dollars) are needed to buy a single unit of some
other currency (a pound).
When the dollar price of pouds falls, for example, from $2 =
£1 to $1 = £1, the dollar has appreciated relative to the pound. When
a currency appreciates, fewer units of it (dollars) are needed to buy
a single unit of some other currency (pounds). In our U.S britain
illustrations, depreciation of the dollar means an appreciation of the
pound, and vice versa. When the dollar price of a pound jump from

8
 $2 = £1 to $3 = £1 the pound has appreciated relative to the dollar
because it takes fewer pound to buy $1. At $2 = £1, it took £1/(2 )
to buy $1; at $3 = £1, it takes only £1/3 to buy $1. Conversely, when
the dollar appreciated relative to the pound, the pound depreciated
relative to the dollar. More pounds were needed to buy a dollar.
2. Determinant of Exchange Rates
What factors would cause a nation’s currency to appreciate or
depreciate in the market for foreign exchange? Here are thee
generalizations:
a. If the demand for a nation’s currency increases (all else equal),
that currency will appreciate; if the demand declines, that
currency will depreciate.
b. If the supply of a nation’s currency increases, that currency will
appreciate; if the supply decreases, that currency will
appreciate.
c. If a nation’s currency appreciates, some foreign currency
depreciates relative to it.
3. Change in Tastes
Any change in consumer tastes or preferences for the
products of a foreign country may alter the demand for that
nation’s currency and change its exchange rate. If tecnological
advances in U.S. wireless phones make them more attractive to
british consumers and businesses. Then the british will supply more
pounds in the exchange market in order to purchase more U.S.
wireless phone. The supply of pounds curve will shift to the right,
causing the pound to depreciate and the dollar to ppreciate.
In contrast, the U.S. demand for pounds curve will shift to the right
if british woolen apparel becomes more fashionable in the united
states. So the pound will appreciate and the dollar will
deppreciate.

9
 With these generalizations in mind, let’s examine the determinants
of exvhange rates, the factors that shift the demand or supply curve
for a certain currency.
4. Relative Income Changes
A nations’s currency is likely to depreciate if its growth of
national income is more rapid than that of other countries. Here’s
why; a country’s imports vary directly with its income level. As total
income rises in the united states, people there buy both more
domestic goods and more foreign goods. If the U.S.economy is
expanding rapidly and the british economy is stagnant, U.S. imports
of british goods, and therefore U.S. demand for pounds, will
increase. The dollar price of pounds will rise, so the dollar will
depreciate.
5. Relative Price level Changes
Change in the relative price levels of two nations may change
the demand and supply of currencies and alter the exchange rate
betweenthe two nation’s currencies. The purchasing power parity
theory holds that exchange rates equate the purchasing power of
various currencies. That is, the exchange rates among national
currencies adjust to match the ratios of the nation’s price levels: if
a certain market basket of goods cost $10,000 in the united states
and £5,000 in great britain, according to this theory the exchange
rate will be $2 = £1. That way, a dollar spent on goods sold in
Britain, Japan, Turkey, and other nations will have equal
purchasing power.
In practice, however, exchnage rate depart from purchasing
power parity , even ovr long priods. Nevertheless, changes in
relative price levels are a determinant of exchange rates. If, for
example, teh domestic price level rises rapadly in the United States
and remains constant in Great Britain, U.S consumers will seek out
low-priced British goods, increasing the demand for pounds. The

10
 British will purchase fewer U.S. goods, reducing the supply of
pounds. This combination of demand and supply changes will cause
the pound to appreciate and the dollar to depreciate.
6. Relative Interest Rates

Changes in relative interest rates between two countries may

alter their exchange rate. Suppose that real interest rates rise in
the united states but stay costant in great britain. British citizens
will then find the united states an attractive place in which to make
financial investments. To undertake these investments, they will
have to supply pounds in the foreighn exchange market to obtain
dollars. The increase in the supply of pound results in depreciation
of the pound and appreciation of the dollar.

7. Speculation

Currency speculators are people who buy and sell currencies

with an eye toward reselling or repurchasing them at a profit.
Suppose speculators expect the U.S. economy to (1) grow more
rapidly than the british economy and (2) experience a more rapid
rise in its price level than will britain. These expetation translate
into an anticipation that the pound will appreciate and the dollars
will depreciate. Speculators who are holding dollars will
depreciate, spectaculators who are holding dollars will therefore
try to convert them into pounds. This effort will increase the
demand for pounds and cause the dollar price of pounds to rise
(that is, cause the dollar to depreciate. A self-fulfilling prophecy
occurs: the pound appreciates and the dollar depreciates because
speculator act on the belief that these changes will in fact take
place. In this way, speculation can cause changes in exchange
rates. (we deal with currency speculation in more detail in this
chapter’s last word).(Campbell & Stanley, 2008)

11
D. Case: The Journey of Indonesian Rupiah
There are three main factors in economic growth, namely the
accumulation of capital through all types of investment, population
growth that will increase the amount of labor and technological
improvement. According to Cobb-Douglas, output (economic growth)
is a proportional share of capital and labor, meaning that if capital and
labor increase then output also increases (Mankiw, 2009)

The relationship between inflation and economic growth has

become an important economic issue. This relationship has been
debated in the economic literature and has shown a different
relationship with world economic conditions. Basic macroeconomic
indicators can be used as an illustration of a country's economic
condition to measure price stability within the country. In general, the
inflation rate can be used to measure price stability in the economy
(Achsani Noer Azam, Arie Jayanthy, & Abdullah, 2010)

Labor is one of the factors of production used in the production

process, even labor becomes the most important factor of other factors
because labor / man is the driving force of all factors of production.
Table below shows that employment growth in Indonesia generally
increased from 2000 to 2015. Labor has a positive and significant
impact on economic growth, as the number of workers increases, it
will increase economic growth.

Macroeconomic indicator of Indonesia 2001-2019

The Workforce IDR against

Years Inflation (%) GDP (%)
that worked (%) USD
1991 1.09 1,992 9.52 6.52
1992 2.61 2,062 4.94 6.04
1993 1.08 2,110 9.77 6.10
1994 3.73 2,200 9.24 7.01

12
 1995 2.37 2,308 8.64 7.60
1996 2.31 2,383 6.63 7.52
1997 1.76 4,650 10.24 4.49
1998 2.57 15,000 77.54 -15.11
1999 1.72 7,100 2.01 0.78
2000 1.14 9,595 0.35 4.69
2001 1.07 10,400 12.55 3.52
2002 0.92 8,940 10.03 4.31
2003 1.25 8,465 5.06 4.56
2004 0.97 9,290 6.40 4.79
2005 0.25 9,830 17.11 5.39
2006 1.57 9,020 6.60 5.21
2007 4.48 9,419 6.59 5.97
2008 2.56 10,950 11.06 5.67
2009 2.21 9,400 2.78 4.42
2010 3.08 8,991 6.96 5.86
2011 -0.74 9,068 3.79 5.81
2012 4.52 9,670 4.30 5.69
2013 0.23 12,198 8.38 5.26
2014 1.63 12,440 8.37 4.78
2015 0.17 13,795 3.35 4.57
2016 13,436
2017 13,548
2018 15,200
2019 14,151
Source: The Central Bureau Of Statistics, Bank Of Indonesia, The World
Bank

13
 CHAPTER III

CLOSING
A. Conclusion
The exchange rate of money in the conventional view and the
Islamic view are clearly different. Because conventional view of money is
a commodity while Islam views money as a medium of exchange that can
be exchanged for goods or services, and Islam does not view money as a
commodity

The exchange rate in the Islamic economy is seen as a necessity and

is permitted with the condition that the activities carried out are limited
to buying and selling (export-import). Because in Islam money is not seen
as a commodity for speculation according to Keynesian theory, but money
is only seen as a medium of exchange and means of payment. Therefore
foreign exchange trading allowed in Islam is only in the type of spot
transaction, namely direct transactions

B. Suggestion
We realize that paper writing is far from perfect, in the future the
author will be more thorough and better at making papers with more
sources that can be accounted for. But to achieve an improvement, the
author is very much expecting constructive criticism and suggestions from
all readers.

14
 BIBLIOGRAPHY

Achsani Noer Azam, Arie Jayanthy, F., & Abdullah, P. (2010). The

Relationship between Inflation and Real Exchange Rate:

Comparative study between ASEAN+3, the EU and North America.

(Finance and Administrative Sciences).

Blanchard, O. (2006). Macroeconomics Fourth Edition. New Jersey:

Prentice Hall.

Campbell, M., & Stanley, B. (2008). Microeconomics. New York: McGrow-

Hill/Irwin.

Dun, B. (2007). Foreign Exhange Markets. New Delhi: Company Limited.

Goldfield, E. D. (1966). Statistical Abstract of The United States (87th

ed.). Washington D.C: U.S. Goverment Printing Office.

Krugman, P. R. (1977). International Economics Theory and Policy (4th

ed.). United States: The Lehigh Press.

Mankiw, G. (2009). Macroeconomics. New York: Worth Publisher.

Schiller, B. (2006). The Micro Economy Today (10th ed.). California USA:

Gary Burke.

15