The rate of exchange means the price of one currency in terms of another currency. Different countries have adopted different exchange rate systems at different times like the Gold Bullion, Gold Standard and the Bretton Woods system. The last system was soon replaced by the Floating Rate System.
Countries of the world have been exchanging goods and services amongst themselves from the time immemorial. With the invention of money, the rigors and problems of barter trade has given way to exchange of goods and services for currencies instead of exchange for goods and services. As every sovereign nation has a distinct national currency, international trade has necessitated exchange of currencies and this exchange of currencies necessitated exchange rate. Like any other commodity, the price of one unit of foreign currency can be stated in terms of domestic company.
[...] In 1944, following world war II , the United States and most of its allies ratified the Bretton Woods Agreement which set up an adjustable parity exchange rate system under which exchange rates were fixed (pegged) within narrow intervention limits (Pegs) by the United States and foreign central banks buying and selling foreign currencies. This agreement fostered by a new spirit of international cooperation, was in response to the financial chaos that had reigned before and after the war. In addition to setting up fixed exchange parities (par values) of currencies in relationship to gold, the agreement established the International Monetary Fund to act as the “custodian” of the system. [...]
[...] Allowing exchange rates to float in the midst of financial chaos was like setting a boat adrift in the middle of a storm—smooth sailing was next to impossible. To make matters worse, the tripling of oil prices by the Organization of Petroleum Exporting Countries (OPEC) during the 1973 hit the foreign exchange market like a hurricane, causing global inflation to rise with the tide. However, the circumstances under which floating rates were introduced are by no means the only problem with the system. [...]
[...] Managed Floating The central bank sets the exchange rate, but adjusts it frequently according to certain pre-determined indicators such as the balance of payments position; foreign exchange reserves or parallel market spreads and adjustments are not automatic. Independently floating Free market forces determine exchange rates. The system actually operates with different levels of intervention in foreign exchange markets by the central bank. It is important to note that these classifications do conceal several features of the developing country exchange rate regimes. [...]
[...] Exchange rate forecasts also help to: Analyze attractiveness of foreign borrowings Plan investments in foreign countries. Plan long term export import strategy Manage exchange rate risk and plan hedging strategies. Now, the exchange rate between two currencies could either be fluctuating or fixed. Logically, forecast for fluctuating exchange rates only would be required by treasury manger, as fixed rates are more or less kept within a narrow band by intervention of the two governments. Techniques of Forecasting Exchange Rate: There are several techniques available to forecast future rates. [...]
[...] Foreign Exchange market Intervention occurs when a government buys and sells foreign exchange in an attempt to influence the exchange rate. Flexible Exchange Rate System In a flexible exchange rate system, the central banks allow the exchange rate to adjust to equate the supply and demand for foreign currency. The terms flexible and floating rates are used interchangeably. Devaluation Devaluation takes place when the price of foreign currencies under a fixed rate regime is increased by official action. The outfall of this is that the foreigners pay less for the devalued currency and the residents of devaluing country pay more for foreign currencies. [...]
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