- September 2014
- Posted By Ninoslav
- 0 Comments
What is the real fun of business unless it earns profit? Business dealings within a country make you deal with home currency. But what about international trade? What about those businesses that happens between two different countries?
Exchange – rate regime is a process that helps in deciding the process of currency dealing while doing a business. To be more precise there are three types of currency exchange rate – floating or flexible currency rate, fixed currency rate and managed currency rate. All these three types have their own pros and cons. All of them are helpful and useful in their own way.
Flexible Exchange Rate
In floating exchange rate market is free from any government or any bank’s interference. Here currency is wholly determined by demand and supply of goods in market. The rate falls if the value of currency falls or supply rises. However it steeply rises if demand rises or supply falls. This method is widely followed by countries that are developed. They allow their currency to fluctuate as per forex market. Though fixed exchange rate provides better confidence and firmness, most countries prefer fluctuating change rate to cover up their profit and country from any disaster or serious economic fluctuation in other countries.
Fixed Exchange Rate
Fixed exchange rate does not fluctuate and it forces countries to do business on fixed rate of exchange. A decrease in exchange rate is called revaluation and increase causes devaluation. Devaluation would make imported products more expensive. That discourages international trade.
Managed Exchange Rate:
Managed exchange rate is adopted by several countries. During extreme appreciation or depreciation central body or any central bank that are designated by government interferes and they decide of rate of exchange. The governing body always keeps extra reserve of foreign currencies. Which is floated or drawn out when home currency depreciates or rises respectively?
International trade would not have been possible without exchange Rate regime. Though widely practiced “What are the positive and negative points of exchange-rate flexibility” gives a valuable insight about flexible rate of exchange.