pegged float exchange rate

(noun)

A currency system that fixes an exchange rate around a certain value, but still allows fluctuations, usually within certain values, to occur.

Related Terms

Examples of pegged float exchange rate in the following topics:

  • 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.
    • The system is a method to fully utilize the peg under the fixed exchange regimes, as well as the flexibility under the floating exchange rate regime.

  • Exchange Rates

    • Exchange rates are determined in the foreign exchange market.
    • For example, the currency may be free-floating, pegged or fixed, or a hybrid.
    • 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.
    • A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency.

  • 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

  • The Exchange Rate Regimes

    • 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.
    • Some governments use a pegged exchange rate, where the government fixes its currency exchange rate to a strong currency, such as the U.S. dollar or euro.
    • A government can use a pegged exchange rate to keep inflation in check if its central bank helps government finance its budget by expanding its money supply.

  • Fixed Exchange Rates

    • A fixed exchange rate is a pegged exchange rate.
    • The United Arab Emirates (UAE) pegged its currency exchange rate to U.S. dollars, where one U.S. dollar equals three dirhams.
    • Thus, the exchange rate returns within the band.
    • Two important terms are associated with a pegged exchange rate.
    • For example, Hong Kong allows the free flow of capital and pegs the exchange rate to the U.S. dollar.

  • Fixed Exchange Rates

    • A fixed exchange rate is a type of exchange rate regime where a currency's value is fixed to a measure of value, such as gold or another currency.
    • A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
    • A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to.
    • China is well-known for its fixed exchange rate.
    • Explain the mechanisms by which a country maintains a fixed 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.

  • Chapter Questions

    • How much does a Pepsi costs in dirhams if Pepsi costs $0.75 with an exchange rate $1 = 3 dirhams?
    • Please calculate the cross-rate exchange rate for the convertible mark (KM) and U.S. dollar for the following exchange rates:
    • A trader at Citibank has 500,000 Bosnian convertible marks (KM) and observes the following exchange rates:
    • The Uzbek government established a fixed exchange rate between the Uzbek som and the U.S. dollar.
    • What should the Uzbek government do to maintain the pegged exchange rate?

  • 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.

  • 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.