Types of international Foreign Exchange Rates
Here we will highlight on the primary types of international change rate governmental system
1. Fixed Exchange Rate System
2. Flexible (Floating) Exchange Rate System
3. Managed Floating Rate System.
Fixed Exchange Rate System:
The fixed exchange rate system refers to a scheme in which the exchange rate for a currency is determined by the regime.
The basic aim of assuming this scheme is to assure stability in foreign trade and capital moves.
To achieve stability, the government attempts to purchase foreign currency when the exchange rate becomes weaker and sell foreign currency when the pace of exchange gets stronger.
For this, the regime has to keep up large reserves of foreign currencies to maintain the exchange rate at the level fixed by it.
Under this scheme, each country keeps the value of its currency fixed in terms of some ‘External Standard’.
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This external standard can be gold, silver, other precious metal, another country’s currency or even some internationally agreed unit of a score.
This external standard can be gold, ash gray, other precious metal, another country’s currency or even some internationally agreed unit of account.
When a value of the domestic currency is linked to the value of another currency, it is recognized as ‘Pegging’.
When the value of a currency is defined in terms of any other currency or in terms of gold, it is recognized as ‘Parity value’ of currency.
Devaluation and Revaluation:
Devaluation refers to a reduction in the value of the domestic currency by the government. On the other hand, Revaluation refers to an increase in the value of the domestic currency by the regime.
Devaluation Vs. Depreciation:
Devaluation refers to a reduction in the price of the domestic currency in terms of all foreign currencies under the fixed exchange rate regime.
Depreciation refers to a fall in the market cost of the domestic currency in terms of foreign currency under a flexible exchange rate regime.
It takes place due to the Government and due to marketplace forces of demand and supply, It takes place under the fixed exchange rate scheme.
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Flexible Exchange Rate System: