Understanding Exchange Rates Intermutional buainesses with m

Understanding Exchange Rates Intermutional buainesses with markets and production facilities in other countries, or that une materials from dfferent countries need to understand the ways and rates at which currency is converted Countries may operats using different exchange rate regimes, all of which have different advartages and disadvantages Govemments around the world pursue a number of diflerent exchange rate policies No one exchange rate system is universal, and the intermational manetary system is continualy emerging One key factor an international business must consider when looking at foreign markets is how the cunency will be converted into the home-country curency Drag each description to the correct aurrency arrangement fred rate Rctuation wthin a band Managed Float Rely on manet and largels

Solution

Fixed exchange rate regime is one under which the exchange rate between currencies in determined or ‘fixed’ by the government through appropriate policies. In this case, the market forces of demand and supply are of no use, because the exchange rate does not change according to those forces, but changes according to the government’s discretion.

Floating or Flexible exchange rate regime on the other hand is one where the exchange rate between currencies is determined by the market forces of demand and supply. Since there is no surety in the value of the exchange rate, there is uncertainty owing to the movement of demand and supply in the market.

Managed float lies between the two extremes of fixed and freely flexible exchange rate regimes. Under this scenario, the exchange rates are free to float, but the government intervenes from time to time to smoothen or manage exchange rate fluctuations within a desired range.

Currency Board is the extreme form of pegged exchange rate where the management of the exchange rate system is done by a monetary authority by pegging the exchange of the local currency to foreign currency and holding an equal amount of it in reserves.

Each currency arrangement and its descriptions are matched as follows:

Currency Arrangement

Description

Floating Exchange Rate

Managed Float

Pegged exchange rate

Currency Board

Currency Arrangement	Description
Floating Exchange Rate	Rely on the market Uncertainty
Managed Float	Fluctuation within a band of less than 1%
Pegged exchange rate	Government intervention to achieve particular goals and targets
Currency Board	Exchange the two at a fixed rate Hold foreign reserves of a specific currency in an amount equal to the domestic currency supply.