EXCHANGE RATE

Introduction to Exchange Rate

Chapter Summary: Introduction to Exchange Rate

Introduction Chapter

The foreign exchange market (FX or Forex) is one of the largest financial markets in the world and also one of the most liquid. According to the assessment Triennial Central Bank which has great authority, prepared by the Bank for International Settlements, Basel, average daily gross earnings for April 2007 exceeded U.S. $ 3.2 trillion, and all points in the sense that the market continues to expand. The spot market accounts for about one third of the total activity of the FX market. This chapter relates to the introduction of exchange rates, and how these rates prevail in the international economy. It raises certain evaluative approach towards exchange rate manipulation and assumptions related to exchange rates.

Summary

Buyers in international markets need to get currencies of the countries they wish to purchase goods and services, so a developed system of international trade can only work if there is a market where a currency can be exchanged for another. This is the task to develop the currency or market changes. The desirability of an efficient market exchange may have experienced simply as a tourist having traveled to a country in which the type exchange was tapped. In these countries, there is often a rate official exchange rate, in which the national currency is overvalued, and exchange rate unofficial market in which the national currency quoted well below the valuation officer. There are many factors that influence the value of a flexible currency rate exchange market, from international trade flows, economic or political situation given the level of interest rates to supply and demand short term. Unlike many other assets, the FX is a pure market and rates move freely in both directions. The exchange rate is the price of the currency of a nation in terms of another currency. There are basically two types of exchange rate systems:

The system of flexible exchange rates

The system of fixed exchange rates

In a system of flexible exchange rates, currency "float" freely and its value is determined by market forces. In a system of fixed exchange rates, the currency cannot fluctuate freely, since its value is fixed in relation to a particular currency such as USD, with a specific type, or in relation to a basket of currencies. In a fixed system, the central bank uses its foreign exchange reserves to prevent any movement of the fixed exchange rate. The dreaded mission of International Monetary Fund (IMF), who just left the country, has recommended the government to adopt an exchange rate policy “more flexible”, i.e. leave completely free the exchange rate or, at best the cases, the BCR only intervene in the currency market to very abrupt changes of parity. The purchase agreement and forward currency contract is a firm, i.e. compliance is mandatory. This type of contract comes two kinds of par- participants: those who seek security (which seek to hedge against the risk of change of exchange rate, to ensure a ...