Types of international Foreign Exchange Rates

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Here we will highlight on the primary types of international change rate governmental system

1. Fixed Exchange Rate System

2. Flexible (Floating) Exchange Rate System

3. Managed Floating Rate System.

Fixed Exchange Rate System:

The fixed exchange rate system refers to a scheme in which the exchange rate for a currency is determined by the regime.

The basic aim of assuming this scheme is to assure stability in foreign trade and capital moves.

To achieve stability, the government attempts to purchase foreign currency when the exchange rate becomes weaker and sell foreign currency when the pace of exchange gets stronger.

For this, the regime has to keep up large reserves of foreign currencies to maintain the exchange rate at the level fixed by it.

Under this scheme, each country keeps the value of its currency fixed in terms of some ‘External Standard’.

 

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This external standard can be gold, silver, other precious metal, another country’s currency or even some internationally agreed unit of a score.

This external standard can be gold, ash gray, other precious metal, another country’s currency or even some internationally agreed unit of account.

When a value of the domestic currency is linked to the value of another currency, it is recognized as ‘Pegging’.

When the value of a currency is defined in terms of any other currency or in terms of gold, it is recognized as ‘Parity value’ of currency.

Devaluation and Revaluation:

Devaluation refers to a reduction in the value of the domestic currency by the government. On the other hand, Revaluation refers to an increase in the value of the domestic currency by the regime.

Devaluation Vs. Depreciation:

Devaluation refers to a reduction in the price of the domestic currency in terms of all foreign currencies under the fixed exchange rate regime.

Depreciation refers to a fall in the market cost of the domestic currency in terms of foreign currency under a flexible exchange rate regime.

It takes place due to the Government and due to marketplace forces of demand and supply, It takes place under the fixed exchange rate scheme.

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Flexible Exchange Rate System:

The flexible exchange rate system refers to a scheme in which the exchange rate is influenced by forces of demand and supply of different currencies in the foreign exchange marketplace.

The value of a currency is allowed to fluctuate freely according to changes in demand and provision of foreign exchange.

There is no official (Government) intervention in the foreign exchange marketplace

The flexible exchange rate is as well experienced as ‘Floating Exchange Rate’.

The interchange rate is set by the marketplace, i.e. of thousands of banks, firms and other institutions seeking to purchase and sell currency for purposes of creating transactions in foreign exchange.

Fixed Exchange Rate System Vs Flexible Exchange Rate System:

It is formally defined in terms of gold or any other currency by the government.

It is influenced by forces of demand and supply of foreign exchange.

In that respect is complete government control as the only government has the power to change it.

In that location is no government intervention and it fluctuates freely according to market conditions.

The exchange rate generally remains stable and simply a small variance is possible.

The exchange rate keeps on shifting.

Managed Floating Rate System:

It is as well recognized as ‘Dirty Floating’

Traditionally, International monetary economists focused their attention along with the framework of either Fixed or a Flexible exchange rate arrangement. By the end of Bretton Woods’s system, many rural areas have taken the method of Managed Floating Exchange Rates.

It adverts to a scheme in which the foreign exchange rate is set by market forces and the central bank determines the exchange rate through intervention in the foreign exchange marketplace.

It is a crossbreed of a defined exchange rate and a flexible exchange rate scheme.

In this system, the central bank intervenes in the foreign exchange market to limit the fluctuations in the exchange rate within certain boundaries. The objective is to hold the exchange rate close to desired target values.

For this, the central bank maintains reserves of foreign exchange to secure that the exchange rate stays within the targeted value.

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