floating exchange rate

Examples of floating exchange rate in the following topics:

• Managed Float

  • Managed float regimes are where exchange rates fluctuate, but central banks attempt to influence the exchange rates by buying and selling currencies.
  • Some economists believe that in most circumstances floating exchange rates are preferable to fixed exchange rates.
  • However, pure floating exchange rates pose some threats.
  • A floating exchange rate is not as stable as a fixed exchange rate.
  • Describe a managed float exchange rate and explain why countries choose managed floats

• Exchange Rate Systems

  • The three major types of exchange rate systems are the float, the fixed rate, and the pegged float.
  • There are three basic types of exchange regimes: floating exchange, fixed exchange, and pegged float exchange .
  • A floating exchange rate, or fluctuating exchange rate, is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market.
  • A currency that uses a floating exchange rate is known as a floating currency.
  • Many economists believe floating exchange rates are the best possible exchange rate regime because these regimes automatically adjust to economic circumstances.

• Exchange Rate Policy Choices

  • A free floating exchange rate increases foreign exchange volatility, which can be a significant issue for developing economies .
  • Flexible exchange rates serve to adjust the balance of trade.
  • When a trade deficit occurs in an economy with a floating exchange rate, there will be increased demand for the foreign (rather than domestic) currency which will increase the price of the foreign currency in terms of the domestic currency.
  • Under fixed exchange rates, this automatic re-balancing does not occur.
  • The developing countries, marked in light blue, may prefer a fixed or managed exchange rate to a floating exchange rate.

• Chapter Questions

  • If a country has a fixed rate regime and experiences a balance-of-payments deficit, please explain how the country must maintain this exchange rate.
  • Furthermore, what happens if the government runs out of reserves and refuses to let the official exchange rate change?
  • If a country has a managed float exchange rate regime and experiences a balance-of-payments surplus, please explain how the country must maintain this exchange rate.

• 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.

• 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.

• The American Dollar and the World Economy

  • As global trade has grown, so has the need for international institutions to maintain stable, or at least predictable, exchange rates.
  • This system resulted in fixed exchange rates -- that is, each nation's currency could be exchanged for each other nation's currency at specified, unchanging rates.
  • Fixed exchange rates encouraged world trade by eliminating uncertainties associated with fluctuating rates, but the system had at least two disadvantages.
  • By 1973, the United States and other nations agreed to allow exchange rates to float.
  • Economists call the resulting system a "managed float regime," meaning that even though exchange rates for most currencies float, central banks still intervene to prevent sharp changes.

• The Exchange Rate Regimes

  • Gold standard forces fixed exchange rates, which economists call a fixed exchange rate system.
  • All exchange rates become fixed that eliminates the exchange rate risk.
  • Investors refer to this as a free float or clean float because, government does not interfere with its exchange rates.Although Canada, Eurozone, Japan, South Korea, and United States allow their exchange rates to change, these countries occasionally intervene with their exchange rates.
  • Most countries use a managed float, where a government allows supply and demand to determine its currency's exchange rate, but it intervenes to achieve economic policy goals.
  • Of course, if investors are pessimistic about a government's ability to manage its exchange rate, they call this dirty float.

• Floating-Rate Bonds

  • Floating rate bonds are bonds that have a variable coupon equal to a money market reference rate (e.g., LIBOR), plus a quoted spread.
  • Floating rate bonds (FRBs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (i.e., quoted margin).
  • There are many variations of floating-rate bonds.
  • Thus, FRBs differ from fixed rate bonds, whose prices decline when market rates rise.
  • They are traded over the counter, instead of on a stock exchange.

• Answers to Chapter 12 Questions

  • Float changes in December and April.
  • The Fed tries to stabilize interest rates.
  • Treasury issues too much debt, then the interest rate increases.
  • Thus, the Fed must purchase these U.S. securities to lower the interest rate.
  • Unsterilized transactions do not offset the change in the money supply when the Fed intervenes in the foreign exchange market, while sterilized transactions, the Fed uses open-market operations to offset any potential change in the money supply as it intervenes in the foreign exchange market.