2011-Nov-30 - Currency Exchange - Understanding Floating Rate vs. Fixed Rate |
| In a layman�s term, currency exchange rate can be defined as the rate or the value at which a country�s currency can be sold or exchange for other currency. Exchange rate is an important consideration especially for frequent travelers since they will have to buy or exchange their money for a local currency of the country they�re visiting to be able to live and spend with ease. Forex takes place anywhere in the world, everyone from individual and small businesses to multi-national companies can trade or exchange foreign currency at any given time as needed. Exchange rate is commonly classified into two � the fixed exchange rate and the floating exchange rate. Fixed Exchange Rate The central bank usually determines and sets the official rate of a currency. Usually called as the government mandated rate, the Fixed Exchange Rate ensures that the private market cannot control the rate of the currency. Using the US Dollar and other major players in the world currency like Euro, Pounds and Yen, the government determines and mandates the currency price. Maintaining the set exchange rate is the main concern of the Central Bank, it�s main task is to ensure that the foreign reserves is enough to supply and meet the demand of the market for those currencies. When deemed necessary, the Central Bank can amend the exchange rate at any given time. The main reason that the government mandates the currency rate is to keep the stability of the market and prevent inflation or deflation rate as much as possible. Floating Exchange Rate The exchange rate that is determined and set by the private sectors is called the Floating Exchange Rate. This exchange rate is usually determined using supply and demand so if for example the demand for a certain currency is high, the value of that currency will definitely go up and once the demand is low the value goes down. People will definitely feel the effect of this demand, once the currency value goes down; the demand for local commodity will rise thus creating more job opportunity for local citizen. There are several aspects that could cause the currency to shift such as the political stability of the country and its economic condition. One thing that can be observed from Floating Exchange Rate is the fact that it can change anytime in return most currency trader favors floating exchange rate because of its shifting nature |
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