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Fixed exchange rate and Floating Exchange Rate

Discuss Fixed exchange rate and Floating Exchange Rate within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Fixed exchange rate As the name suggests, under fixed exchange rate system, the value of a currency in terms of ...

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Fixed exchange rate and Floating Exchange Rate
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Abhijeet S
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Fixed exchange rate and Floating Exchange Rate - September 10th, 2010

Fixed exchange rate

As the name suggests, under fixed exchange rate system, the value of a currency in terms of another is fixed. These rates are determined by governments or central banks of the respective countries.

The fixed exchange rates result from pegging their currencies to either some common commodity or to some particular currency. The rates remain constant or they may fluctuate within a narrow range. When a currency tends crossing over the limits, governments intervene to keep within the band.


Normally countries pegs its currency to the currency in which the major transactions are carried out or some countries even peg their currencies to SDR. For example


: - US dollar has 24 currencies pegged to itself whereas French franc has 14 currencies and 4 currencies are pegged to SDRs. The major advantage of this system is that it provides stability to international trade and exchange rate risk is reduced to some extent.


Because of the fixed exchange rate system, exporters and importers are clear how much they have to pay each other on the due date.

The disadvantage is that it is prone to speculation i.e. a speculator anticipating devaluation of pound sterling will buy US dollars at a forward rate so as to sell them wFloating Exchange Rates:


Floating Exchange Rate:

When the relative price of currencies are determined purely by force of demand and supply and when the authorities make no attempt to hold the exchange rate at any particular level within a specific band or move it in a certain direction by intervening in the exchange markets, it is referred to as Floating Exchange Rate.
hen devaluation of the pound takes place.


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Re: Fixed exchange rate and Floating Exchange Rate
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Rose Marry
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Re: Fixed exchange rate and Floating Exchange Rate - April 12th, 2016

Quote:
Originally Posted by abhishreshthaa View Post
Fixed exchange rate

As the name suggests, under fixed exchange rate system, the value of a currency in terms of another is fixed. These rates are determined by governments or central banks of the respective countries.

The fixed exchange rates result from pegging their currencies to either some common commodity or to some particular currency. The rates remain constant or they may fluctuate within a narrow range. When a currency tends crossing over the limits, governments intervene to keep within the band.


Normally countries pegs its currency to the currency in which the major transactions are carried out or some countries even peg their currencies to SDR. For example


: - US dollar has 24 currencies pegged to itself whereas French franc has 14 currencies and 4 currencies are pegged to SDRs. The major advantage of this system is that it provides stability to international trade and exchange rate risk is reduced to some extent.


Because of the fixed exchange rate system, exporters and importers are clear how much they have to pay each other on the due date.

The disadvantage is that it is prone to speculation i.e. a speculator anticipating devaluation of pound sterling will buy US dollars at a forward rate so as to sell them wFloating Exchange Rates:


Floating Exchange Rate:

When the relative price of currencies are determined purely by force of demand and supply and when the authorities make no attempt to hold the exchange rate at any particular level within a specific band or move it in a certain direction by intervening in the exchange markets, it is referred to as Floating Exchange Rate.
hen devaluation of the pound takes place.


hey there,

Here I am sharing Fixed Versus Floating Exchange Rates, so please download and check it.
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File Type: pdf Fixed Versus Floating Exchange Rates.pdf (30.1 KB, 0 views)
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