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Welcome to Padlet wall. Here, in this wall I am going to give a brief description on exchange rate. to be specific, I am going to cover few questions on exchange rate as; What is Exchange rate? How does it work? What is its importance? What are the different types of Exchange rate, etc. So, starting from meaning of the Exchange rate, it defines the rate in the market in which the currency of one country is to be exchanged and converted into the other country's currency.

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This below posted image describes the buying and selling rate in the market according to their respective countries. For an instance; USA has its currency of dollar which has its fixed buying and selling rate as 29.75 and 30.55 respectively. Similarly, Australia consists of 31.68 dollar as its buying price and stands at 32.85 wage as the selling rate in the finance.

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The picture states the types of exchange rate risk's can occur. This post mainly focuses on three different type of risks during foreign exchange. the types are; Transaction risk, Translation risk and Economic risk. Out of them, I think that Transaction and Translation risks are almost similar because they each describes the same reason as when a company receives the different currency rather than the operating currency. At last, economic risk are the simple reasons that changes in the market value during the exchange rate.

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1. As my topic "EXCHANGE RATE". It mainly focuses on the theory of converting one currency into another including fluctuating market value. I was astonished and surprised about the working process of this system.
2. By comparing this topic to my real life, I had experienced in depth about this system as, basically I am from India so I am used to with my currency of "rupees" however, when I came to Canada I had to convert the currency of Indian rupees to a Canadian dollar. thus, at this time exchange rate system helped me.
3. The thing which I would like to pass on to my family members and my friends is; to make sure about the current value going on in the market and to take prevention from the risks of this Exchange rate system.

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This cite displays the statistics of the Bank of Canada. It represents various types of rates including; exchange rate and interest rate. Exchange rate includes daily exchange rates, monthly exchange rates, annual exchange rates, currency converter and many more. Similarly, Interest rate includes; Canadian interest rates, Canadian bonds, Key interest rate lookup, daily exchange rates lookup, etc. This bank has its own pdf describing the exchange rate of currencies between the country Canada and Us and bunch of other countries.

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All Bank of Canada exchange rates are indicative rates only, obtained from averages of aggregated price quotes from financial institutions. For details, please read our full Terms and Conditions.

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All Bank of Canada exchange rates are indicative rates only, obtained from averages of aggregated price quotes from financial institutions. For details, please read our full Terms and Conditions.

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This website expresses 8 leading factors which determines the alteration in exchange rate along with explaining the reasons behind this disruption in the market value. Names of the factors are; 1. Inflation, 2. Interest Rate, 3. Country's current account/Balance of payments, 4. Government debt, 5. Terms of trade, 6. Political stability and performance, 7. Recession, 8. Speculation.

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This cite mainly focuses on the various types of exchange rate available in the market including its advantages and its disadvantages. Some of them are: fixed rate, Flexible rate, Forward rate, Spot rate and Dual rate. Some of them have more advantages whereas, on the other side some consists of maximum disadvantages. As I looked in the fixed rate I was much interested in the advantages of that explaining the benefits of looking attractive for the foreign investors to invest in it.

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"Exchange rates is an amount of the domestic currency you will have to pay to obtain a unit of a foreign currency."
Imagine for a moment, new year is just around the corner. You have finally been able to approve your vacation leave from your boss and you have painstakingly managed to accumulate savings needed to go backpacking across Europe. Like an arrow shot from a bow, you take the first flight out and finally land on European land. The flight was a long one and you feel famished and look for a Subway at the airport. Having custom made your own lip-smacking Sub you pull out a wad of dollars and slide it across the counter to make the sandwich yours. The cashier throws you a puzzled look. Just then you come across the sign "We Only Accept Payment in Euros". It finally sinks in!

The Sub was selling at a price of €3. Since you only held US Dollars, you rushed to get your money converted into Euros from the currency exchange. The exchange rate quoted for the day stood at $1.17 per €1. In simplified terms, a person wishing to convert dollars will have to give up $1.17 to obtain a unit of Euro. Therefore, the amount in dollars given up to pay for the Sub equal (1.17 * 3) $3.51.

Types of Exchange Rates

Fixed Exchange Rate

A fixed exchange rate, also known as the pegged exchange rate, is "pegged" or linked to another currency or asset (often gold) to derive its value. Such an exchange rate mechanism ensures the stability of the exchange rates by linking it to a stable currency itself. Also, a fixed currency system is relatively well protected against the rapid fluctuations in inflation. Some countries following a fixed rate system include Denmark, Hong Kong, Bahamas & Saudi Arabia.

Advantage: A country with a fixed exchange rate system is attractive to foreign investors who are lured to invest in that country due to the stability it offers.

Disadvantage: The government of a country following such a system has to maintain a huge amount of foreign exchange or gold reserves to maintain its value. This system thus proves to be an expensive one.

Flexible Exchange Rate

Flexible or Floating exchange rate systems are ones whereby the rate of a currency is determined by the market forces of demand and supply. Unlike the fixed exchange rate they do not derive their value from any underlying. Some economists argue that a floating system is more preferable since it absorbs the shocks of a global crisis and automatically adjusts to arrive at an equilibrium.

The central bank of the country may interfere in economically extreme situations such as the recession or boom to stabilize the currency. They may buy or sell an amount of the currency to prevent the rates from going haywire. This phenomenon is known as the managed float.

Advantage: The rates under this system are determined by a self-sufficient mechanism. Therefore, the dependence on government or international monetary organizations is minimum. Also, the determination of rate by the market forces of demand and supply promote efficiency and robustness of operations.

Disadvantage: Floating rate systems are prone to greater volatility since they are determined by the market forces. The increased volatility increases the risk quotient in such markets consequently making it a relatively expensive place for the foreign investors.

Forward Rate

A forward rate is a one that is determined as per the terms of a forward contract. It stipulates the purchase or sale of a foreign currency at a predetermined rate at some date in the future. A forward contract is generally entered into by exporters and importers who are exposed to Forex fluctuations. The forward rate is quoted at a premium or discount to the spot price.

Advantage: A forward contract freezes the rate of exchange for both the parties and thus eliminates the element of uncertainty. Therefore, it provides a complete hedge against all unruly movements in the market.

Disadvantage: A forward contract is not backed by any exchange. Therefore the possibility of default is quite high. Also freezing the rates may prove to be a loss-making decision in some situations. For example, a long forward in a bearish market or a short forward in a bullish market are instances of the forward backfiring.

The spot rate is the current exchange rate for any currency. It is the rate at which your currency shall be converted if you decided to execute a foreign transaction "right now". They represent the day-to-day exchange rate and vary by a few basis points every day.

Advantage: Trading at a spot rate does not require deep mathematical or statistical analysis. It is what it is. It is a straightforward rate without any ambiguity.

Disadvantage: Spot rates can be a misleading indicator in times of economic crisis, unreasonable demand or supply patterns or temporary transitional phases in an economy.

Dual Exchange Rate

In this type of system, the currency rate is maintained separately by two values-one rates applicable for the foreign transactions and another for the domestic transactions. Such systems are normally adopted by countries who are transitioning from one system to another. This ensures a smooth changeover without causing much disruption to the economy.

Advantage: Countries enforcing a dual exchange rate can enforce separate rates for capital and current account transactions. Therefore a significant amount of control is with the government whereby it can influence revenues from capital or current sources depending upon the need of the hour. It also becomes easier to regulate international trade and at the same time protect the domestic markets.

Disadvantage: A dual exchange rate system may cause mis-fixing of the exchange rate and consequent misallocation of resources in various industries. Because of these several economic anomalies such as black markets, arbitrage opportunities and inflation may emerge.

Interpreting Currency Exchange Quotes

Direct & Indirect Quotes

A direct currency quote uses the domestic or home currency as the base. For example, for an American national, the direct currency quote to obtain Euros will look like USD/EUR 1.17.

An indirect currency quote denotes the domestic currency as the quoted currency. Or in simpler terms, the value of our home currency is expressed in terms of the foreign currency sought to be acquired or sold. For example, EUR/USD 0.87. This means that a European Currency holder will have to give up 0.87 Euros to acquire 1 USD.

Bid & Ask Price

In the practical life, currency quotes are always quoted as USD/EUR 1.1681-1.1685

The former part of the quote USD/EUR 1.1681 is known as the bid rate. Bid rate is the rate at which the bank will pay you should you go to it to buy Euros against USD. It is nothing but the buying rate for the bank.

The latter part of the quote USD/EUR 1.1685 is known as the ask rate. Ask rate is the rate which the bank "asks" from you to obtain a unit of Euro against value in dollar. It is nothing but the selling rate for the bank.

It is important to know that the ask rate will always exceed the bid rate.The bank will always buy at a lower rate and sell at a higher rate. The simple reason for it being that the difference is the margin that the bank earns for facilitating such currency exchange.

Cross Currency Rate

Reserve currency or an anchor currency is essentially the one in terms of which most other currencies are expressed. Such currency is held in large amounts by governments as Forex reserves. The US Dollar is currently the most widely held reserve currency followed by the Euro.

Consequently, a currency quote not expressed in terms of USD is known as a cross rate. All dominant and frequently traded currencies are translated in terms of USD. However, certain transactions may be such that they do not contain the dollar component at all. In such cases, the currency quotes are required to be expressed at a rate relative to one another to facilitate that exchange.

The following example shall clear the concept.

A manufacturer in Germany wants to obtain certain automobile parts from a supplier in Australia. The supplier only accepts payment in Australian Dollars (AUD). Therefore, the German manufacturer will be compulsorily required to convert EUR to AUD to close the contract. The amount payable to the Australian Supplier is AUD 350,000.

The following quotes are quoted by the exchange.
EUR/USD 1.1670-1.1674
USD/AUD 1.3561-1.3570

The quote relevant to the German manufacturer is EUR/AUD
Therefore, the same is obtained by carrying out the simple working mentioned below

The simple multiplication of (bid*bid)-(ask*ask) gives the required cross rate.
= (1.1670*1.3561) -(1.1674-1.3570)
=1.5826-1.5841
Therefore, the amount payable to the bank to obtain AUD 350,000 is (350,000/1.5841) EUR 220,945.

References

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Types of Exchange Rates | Fixed, Floating, Spot, Dual etc - Interpretation

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"Exchange rates is an amount of the domestic currency you will have to pay to obtain a unit of a foreign currency." Imagine for a moment, new year is just around the corner. You have finally been able to approve your vacation leave from your boss and you have painstakingly managed to accumulate savings needed to go backpacking across Europe.

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This cite reports the importance of exchange rate. It also covers the part of buying and selling rate of each individual country. Moreover, also defines the reasons behind the variation of the different types of rates. Also, I understand the knowledge behind the question that Why do they move so frequently? and Why do this matter to us?

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The below uploaded video describes the effects of changes in foreign exchange rate. It explains two type of currency being used namely; functional currency- meaning, company operates the same currency and uses it to target the market value. Whereas, presentation currency- currency in which the finance is to be represent. With of the help of 3 countries currency it is being tried to make us understand about the different transactions occurring in the market.

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IAS 21 The Effects of Changes in Foreign Exchange Rates CMA

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This video states the advantages and disadvantages of floating and fixed exchange rate system. I think that after seeing this video I get to know about the benefit of floating exchange rate system in which we don't have to worry about the interest rate to manage exchange rate. However, in fixed rate it is necessary to have fixed interest rate to manage exchange rate. So, this video gives really a very good understanding towards the pros and cons of floating and fixed exchange rate systems.

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Alt Academy: Economics with Ali Anwerzada

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Day 24 Floating vs fixed Advantages and Disadvantages

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This video informs us about the working process of the exchange rate system. Also explains few factors which affects the value of currencies in countries around the world. It describes the ways of getting the exchange rate more proficiently, they uses the floating exchange rate system, fixed exchange rate system and manage exchange rate system.

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● We explain topics simply. So Subscribe if you want to learn while being entertained. ✔ Please like the video and comment if you enjoyed - it helps a lot! ▶ If you want a question answered then ask in the comments and we may make a video about it!

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This video describes the meaning, definition and explanation of the Exchange rate system with the help of two country's currency as; Japanese- yen and US- dollar. It helped me a lot in understanding the real concept of Exchange rate in the finance system.

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What is EXCHANGE RATE? What does EXCHANGE RATE mean? EXCHANGE RATE meaning, definition & explanation