Foreign exchange rate is the price of one nations currency in
terms of the currency of another nation. Exchange rates are either
fixed by governments or determined by
free forces of market with
regards to demand and supply of the same. Prior to World War II,
most of the currencies of world were convertible to gold. Later, the
Bretton Woods system came into existence wherein countries of
the world pegged their foreign exchange rate to the U.S dollar. After
1973, the Flexible exchange rate system came into existence under
which the foreign exchange rate was
influenced by the market
demand and supply factors. The two prominent exchange rate
systems are
Fixed exchange rate system (Pegged system) and
Flexible exchange rate system ( Fluctuating system). The
transaction in the foreign exchange market viz., buying and selling
foreign
currency take at a rate, which is called
„Exchange rate‟.
This market is not any physical
place but a network of
communication system connecting the whole complex of institutions
including banks, specialized foreign exchange dealers and official
government agencies through which
the currency of one country
can be exchanged for that of another (converted into another)
10.2.1 FIXED EXCHANGE RATE? ITS MERITS AND DEMERITS:
This is the system where the
exchange rate is fixed and
found rigid irrespective of changes in the demand and supply of
exchange. This rate is fixed by
the government by means of
pegging operations.(Buying and selling exchange at a particular
rate).Government follows exchange
control to keep the rates
stable. It helps to reduce the exchange reserves. It is the feature of
IMF agreement.
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