floating exchange rate

Examples of floating exchange rate in the following topics:

• International Exchange of Money

  • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.
  • The spot exchange rate refers to the current exchange rate.
  • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date .
  • The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
  • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.

• Balance of Payments

  • All the activities listed above are sources of foreign exchange because foreigners are paying the U.S. so the total would be $4.5 billion.
  • Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies.
  • Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate).
  • The central bank does not intervene with a pure float to protect or devalue its currency, it allows the rate to be set by the market.
  • The central bank's foreign exchange reserves do not change.

• Exchange Rates

  • A foreign currency exchange rate between two currencies is the rate at which one currency will be exchanged for another.
  • Exchange rates are determined in the foreign exchange market.
  • The exchange rate, as well as fees and charges, can vary significantly on each of these transactions, and the exchange rate can vary from one day to the next.
  • If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand.
  • This currency is said to have a "floating exchange rate. " Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world.

• Debt Finance

  • Public debt is a general definition covering all financial instruments that are freely trade-able on a public exchange or over the counter, with few if any restrictions.
  • Lending to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate".
  • A risk-free rate is also commonly used in setting floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor (in other words, the risk of him or her defaulting and the creditor losing the debt).
  • In reality, no lending is truly risk free, but borrowers at this rate are considered the least likely to default.

• Global finance: initial considerations

  • The price of one country's currency in units of another country's currency is known as a foreign currency exchange rate.
  • Exchange rates can be quoted in two ways.
  • If an exchange rate is an indirect quote, the exchange rate is stated as the number of foreign units per one unit of domestic currency (Beenhakker, 2001).
  • Currency risk is the potential consequence from an adverse movement in foreign exchange rates (Coyle, 2000).
  • Currency risk arises because exchange rates are volatile in the short and the long-term and the future movements of exchange rates cannot be predicted.

• The political/legal environment

  • The exchange rate of a particular nation's currency represents the value of that currency in relation to that of another country.
  • Governments set some exchange rates independently of the forces of supply and demand.
  • If a country's exchange rate is low compared to other countries, that country's consumers must pay higher prices on imported goods.
  • While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exporters and importers.

• Commercial Banks

  • Commercial banks enable business by providing access to resources and risk-mitigating exchanges.
  • Enabling bank accounts, used to store, exchange, send, and receive capital electronically (generally via the internet)
  • Providing loans and other lending services, at established rates of interest
  • Risk management (i.e. foreign exchange risks, interest rates, hedging commodities, derivatives)
  • It is in measuring these risks that banks determine their interest rates and fees.

• Growth Through Monetary Policy

  • Monetary policy seeks to further economic policy goals through influencing interest rates.
  • With lower interest rates, it's cheaper to borrow money, and banks are more willing to lend it.
  • Monetary policy uses a variety of tools to control one or both of these in order to influence economic growth, inflation, exchange rates, and unemployment.
  • In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold.
  • For example, in the case of the United States, the Fed targets the federal funds rate, the rate at which member banks lend to one another overnight; however, the monetary policy of China is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies.

• The International Monetary Fund (IMF)

  • The IMF seeks to promote international economic cooperation, international trade, employment, and exchange rate stability.
  • The IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the world's international payment system post-World War II.
  • The organization's stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs.
  • Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of changes in procedures rather than through the adoption of new obligations.The responsibilities of the fund changed from those of guardian to those of overseer of members' policies.
  • IMF conditionality is a set of policies or "conditions" that the IMF requires in exchange for financial resources.

• Open Market Operations

  • If the economy is contracting, the Fed would want lower interest rates to stimulate borrowing and spending again.
  • The usual aim of open market operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply.
  • This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments.
  • Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation.
  • Transactions are handled over the counter, not on an organized exchange.