Exchange Rate

Exchange Rate

Introduction

The exchange rate of a currency is the price of one currency expressed in another currency. The exchange rate of the euro against the dollar shows for example how many Euros you can get against the dollar and vice versa. The exchange rate market is one that is established on the foreign exchange markets in every moment of the day and given the supply and demand of both currencies.

The exchange rate is said to be fixed when two countries agree to defend an official exchange rate by intervening in the foreign exchange market. It is called flexible if there is no official exchange rate. In addition, the exchange rate is flexible in principle, but the states that participate in a regional agreement may adopt a fixed exchange rate regime. The purpose of this work is to study the most relevant and the behavior of the exchange rate, as well as their characteristics and intervenes in the market; this shall also analyze the origins and categories of the exchange rate system. Similarly, we will study the variety of factors that determine the level of the exchange rate, and the determinants of market expectations of customers to that (Barclay, 2001).

Discussion

The exchange rate is the domestic currency price of a foreign currency. The exchange rate is the price of the currency and the latter is the foreign currency held by economic agents of a country. Currently this value is determined by supply and demand. The exchange rates are important information that guides international transactions of goods, capital and services. The exchange rate is not only the price of one currency in terms of another. Variations in the exchange rate affect prices (relative) of goods and services produced in a country over those produced in other countries, affecting prices of all assets and liabilities denominated in a currency denominated regarding another. The exchange and its variations are therefore a primary importance in the current economy. A factor that affects the behavior of the exchange rate, is almost all exogenous, and therefore requires the intervention for its effect on the market. Another factor that influences the exchange rate is the political situation, as the way traders perceive the performance. Government pressed on the exchange rate, which has become an indicator of the country's political stability (Barclay, 2001).

Types of Exchange Rate

Fixed exchange rate:

This system aims to keep constant over time, the relationship of the two currencies, i.e. the amount of pesos that are needed to buy a dollar (or other currency) is the same as always. In this case, the central bank, which in the case of Colombia is the Central Bank, is committed to maintaining this relationship and take action to meet this objective. Therefore, when there is much market demand for dollars or any other currency (foreign currency), the Bank brings to market the dollar amount needed to maintain the exchange rate at the value determined. Similarly, when there are excess supply (when more dollars in the market that are asking or ...