About Exchange Rate

About Exchange Rate

Exchange rate, also called foreign-exchange rate or forex rate between two currencies is the rate at which one currency exchanges with another currency. Exchange rate is regarded as the value of a country’s currency in terms another country’s currency. For instance, an interbank exchange of 50 Japanese Yen the US dollar means that ¥50 is exchanged for each US$1. on the other hand, it means that US$1 is exchanged for ¥50. Foreign exchange market is where the exchange rates are determined.

Foreign exchange market is open to different types of buyers and seller whereby currency trading continuous takes place. In most cases, foreign exchange markets operate 24 hours every day. The current exchange rate between two currencies is called the spot exchange rate. The exchange rate that is quoted and traded today but delivery and payment done on a specific future date is called the forwarded exchange rate.

Currency Selling and Buying Rates

In the retail currency market, money dealers quote different buying and selling rates. The buying rate is the rate at which a money dealer buys a foreign currency. The selling rate is the rate at which the money dealer sells the currency. Quoted rates incorporate an allowance for the profit margin of a dealer in the process of trading. Otherwise, the dealer may recover the profit margin in form of commission or in other ways. Dealers may quote different rates for cash, which is most cases are notes only, documentary form like traveler’s cheques or electronically like credit card purchase. Documentary transactions involve higher rates. This is due to additional time and cost of clearing the document.

Retail Exchange Rate Market

People may require exchanging currencies in different situations. For instance, someone who intends to travel to another country may buy foreign currency in a bank in his or her country. Such individuals may buy such foreign currencies in cash, using traveler’s cheque or credit card. One can also buy the local currencies at their hotel, a local money changer, through an ATM or at a bank branch. When an individual wants to purchase goods from a store and he does not have local currency, he can use credit card. The card will convert to the purchaser’s home currency at its current exchange rate. However, if the buyer has traveler’s cheque or card in local currency, the currency exchange is not necessary. The exchange rates and fees charged vary significantly on every transaction. The exchange rate can vary from one day to the next day.

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Exchange Rate regime

Every country use different mechanisms in managing the value of its currency. As part of this purpose, a country will determine the exchange rate regime that will apply to its currency. For instance, the currency of a country may either be free-floating, pegged, fixed or hybrid. A currency, which is free-floating, allows its exchange rate to vary against those of other currencies. In this case, market forces of supply and demand determine the exchange rate of such currencies. The exchange rates of such currencies change constantly as quoted on financial markets. Peg system is a system that involves fixed exchange rates. However, it occurs with a provision of for currency devaluation. For example, from the end of the Second World War until the year 1967, Western European countries maintained fixed exchange rates with the US dollar on the basis of the Breton Woods System. However, they had to abandon this system due to pressures and speculations of the market in 1970s. the speculation happened in favor of floating and market based regimes.

Fluctuations in Exchange rates

A market-based exchange rate changes whenever the values of two currencies change. A currency will tend to be more valuable whenever its demand exceeds the supply. The opposite scenario will cause the decrease in the value of the currency. Increase in demand for a certain currency can be due to increased transaction demand for money. It can also be due to increased speculative demand for money. The transaction demand is highly correlated to a country’s level of business activities, gross domestic product (GDP), and employment levels. The more the number of unemployed in a country, the less the public spend on goods and services. Central banks can do little in adjusting the available money supply in order to accommodate changes in the demand for money due to business transactions.

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