Fixed vs Floating Interest Rate

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

B the permanent movement of funds from one currency to another in the hopes of profiting from long. term investment in a particular country.

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

One needs to have a base level understanding of what defines an exchange rate. According to Investopedia, a foreign exchange rate is “The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.”(Investopedia, 2012) The process by which foreign exchange rates are determined is really not any different than any other

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

An exchange rate is the price for which one currency is worth converted into another rate. The exchange rate is determined by the supply and demand conditions of relevant currencies in the market transaction of currency exchanges occur in the foreign exchange markets. For example, currently, the £1 is worth $1.67 which means that at this stage, the pound is stronger than the dollar. Businesses should ensure that they frequently check the exchange rates to see if any changes to their prices need to be made or if the exchange rate benefits them. If Iron Bru were to export a large amount of products to a country such as Germany or Poland, there will

An exchange rate is the value of a currency compared another currency to find a ratio and a rate of exchange if one were to take place. According to X-Rates these some exchange rates with the United States dollar; 1 USD to .90 Euro, 1 USD to .70 British pound, 1 USD to 1.33 Canadian dollar, 1 USD to 113.77 Japanese Yen, and 1 USD to 6.5 Chinese

Exchange Rate: "The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency"

(Wright and Quadrini, 2009, p. 221) In order to influence the Foreign exchange rate a country will perform an unsterilized foreign exchange intervention, subsequently, these transactions will influence the FX rate exchange because they influence the monetary base. The reasons for interventions vary, but one is to stabilize the FX exchange rate. An example of a unsterilized transaction would be if a Central Bank bought $50 million Foreign international reserves. It would increase foreign international reserves and the monetary base. In contrast, there is a sterilized transaction in which the Central Bank which should not have a long term impact on the Foreign exchange rate. To offset the purchase of the $50 million Foreign reserves it might sell $50 million domestic bonds. (Wright & Quadrini, 2009, p.

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

Every country has its own currency, which is a means of payment and allows various types of financial transactions within the country. However, between different countries is also necessary to make any cash payments or transactions. An exchange rate measures the value of one currency against the value

In this, government agrees to buy and sell unlimited amount of the currency at a fixed price. Example: Thai bhat before 1998.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.