Scribd
Upload
14 views2 pages

Foreign Exchange

Foreign exchange rates are determined by either fixed or floating systems. Under a fixed system, a central bank pegs a currency to another and maintains stability through foreign exchange market intervention. Factors like inflation, trade balances, and politics can influence rates. Floating systems rely on supply and demand, avoiding intervention but allowing more volatility. A managed float combines features of both by having some central bank involvement in currency trading.

Uploaded by

surinderkumar02
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
14 views2 pages

Foreign Exchange

Foreign exchange rates are determined by either fixed or floating systems. Under a fixed system, a central bank pegs a currency to another and maintains stability through foreign exchange market intervention. Factors like inflation, trade balances, and politics can influence rates. Floating systems rely on supply and demand, avoiding intervention but allowing more volatility. A managed float combines features of both by having some central bank involvement in currency trading.

Uploaded by

surinderkumar02
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Foreign Exchange

Foreign Exchange Rate is defined as the price of the domestic currency with respect to
another currency. The purpose of foreign exchange is to compare one currency with another
for showing their relative values.
Foreign exchange rate can also be said to be the rate at which one currency is exchanged with
another or it can be said as the price of one currency that is stated in terms of another
currency.
Exchange rates of a currency can be either fixed or floating. Fixed exchange rate is
determined by the central bank of the country while the floating rate is determined by the
dynamics of market demand and supply.

Factors Affecting the Exchange Rate


Exchange rate is impacted by some factors which can be economic, political or psychological
as well. The economic factors that are known to cause variation in foreign exchange rates are
inflation, trade balances, government policies.
Political factors that can cause a change in the foreign exchange rate are political unrest or
instability in the country and any kind of political conflict.
Psychological factors that impact the forex rate is the psychology of the participants involved
in foreign exchange.

Types of Exchange Rate Systems


There are three types of exchange rate systems that are in effect in the foreign exchange
market and these are as follows:
1. Fixed exchange rate System or Pegged exchange rate system: The pegged exchange
rate or the fixed exchange rate system is referred to as the system where the weaker currency
of the two currencies in question is pegged or tied to the stronger currency.
Fixed exchange rate is determined by the government of the country or central bank and is
not dependent on market forces.
To maintain the stability in the currency rate, there is purchasing of foreign exchange by the
central bank or government when the rate of foreign currency increases and selling foreign
currency when the rates fall.
This process is known as pegging and that’s why the fixed exchange rate system is also
referred to as the pegged exchange rate system.
Advantages of Fixed Exchange Rate System
Following are some of the advantages of fixed exchange rate system

1. It ensures stability in foreign exchange that encourages foreign trade.


2. There is a stability in the value of currency which protects it from market fluctuations.
3. It promotes foreign investment for the country.
4. It helps in maintaining stable inflation rates in an economy.
Disadvantages of Fixed Exchange Rate System
Following are some of the disadvantages of the fixed exchange rate system
1. There is a constant need for maintaining foreign reserves in order to stabilise the economy.
2. The government may lack the flexibility that is required to bounce back in case an
economic shock engulfs the economy.
2. Flexible Exchange Rate System: Flexible exchange rate system is also known as the
floating exchange rate system as it is dependent on the market forces of supply and
demand.There is no intervention of the central banks or the government in the floating
exchange rate system.
Advantages of Floating Exchange Rate System
Following are the advantages of the floating exchange rate system
1. There is no need to maintain foreign reserves in this exchange system.
2. Any deficiencies or surplus in Balance of Payment is automatically corrected in this
system.
Disadvantages of Floating Exchange Rate System
Following are some of the disadvantages of the floating exchange rate system
1. It encourages speculation that may lead to fluctuations in the exchange rate of currencies in
the market.
2. If the fluctuations in exchange rates are too much it can cause issues with movement of
capital between countries and also impact foreign trade.
3. It will discourage any type of international trade and foreign investment.
3. Managed floating exchange rate system: Managed floating exchange rate system is the
combination of the fixed (managed) and floating exchange rate systems. Under this system
the central banks intervene or participate in the purchase or selling of the foreign currencies.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy