What is the exchange rate that many people are interested in finding out today? The following article Filipinance.com introduces you to exchange rates, classifications and factors affecting exchange rates.
Table of Contents
What is the exchange rate?
The exchange rate is the rate of one currency when converted to another currency, simply understood as the conversion of two currencies. According to the Law on State Bank of Philippines, the exchange rate is the ratio of the value of Peso to a foreign currency.
The exchange rate is determined by the supply and demand of foreign currencies, with the regulation of the State Bank to ensure the transparency and sustainability of the money market.
Exchange rate classification
The foreign exchange market has different rates, here are some tips for dividing the exchange rate:
Based on rate value
Nominal exchange rate: is the rate of currency expressed in current prices, regardless of any effects from inflation.
Real exchange rate: is an exchange rate that takes into account the impact of inflation or the purchasing power of a currency pair, reflecting the prices of correlated products sold abroad or consumed domestically. This rate also represents the international competitiveness of that country.
Based on foreign exchange transfer method
Exchange rate: is the rate listed at the bank, is the exchange rate of foreign exchange by electricity. The exchange rate is the base rate used to determine other exchange rates.
Mail exchange rate: is the exchange rate of foreign exchange by mail, the exchange rate is also higher than the exchange rate of the letter of exchange.
Based on time of foreign exchange transactions
Buying rate: The exchange rate charged by the bank to buy foreign exchange.
Selling rate: It is the rate at which the bank sells foreign exchange.
The buying rate can be lower than the cost rate and the difference, which is the bank’s foreign exchange business.
Based on payment term
Spot rate: this is the rate quoted by a credit institution at the time of the transaction or agreed by the two parties, but it is necessary to ensure the chart prescribed by the State Bank. The payment between the parties needs to be made within the next 2 working days, after the date of commitment to buy/sell.
Forward exchange rate: is the exchange rate of the credit institutions which are self-calculated and agreed upon, but must be within the prescribed range of the current forward rate of the State bank at the time of delivery. contract.
Based on the object determined rates
Official exchange rate: is the rate set by the central bank, on the basis of which commercial banks or credit institutions fix the exchange rate for foreign currency spot trading with term, swap.
Market rate: is the exchange rate built with the basis of the supply and demand linkage of the foreign exchange market.
Bilateral exchange rate
Bilateral exchange rate: is the price of a currency against another country’s currency excluding the inflation of the two countries.
Effective exchange rate
The effective exchange rate is the multilateral nominal rate or the effective nominal rate.
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What is the exchange rate mode?
The exchange rate regime is the method by which a country governs its currency in relation to foreign currencies and dominates the foreign exchange market. The exchange rate regime in each country and each period may not be the same.
Types of current exchange rate modes
Currently there are several exchange rate regimes such as:
Floating exchange rates
This is a mode where the value of a currency is fluctuated on the foreign exchange object. A currency that uses a floating rate is called a floating currency.
Fixed exchange rate
A type of exchange rate regime in which the value of a currency is tied to the value of another currency or to another unit of measure such as gold.
Regulated floating exchange rate
A regulated floating rate is an exchange rate regime that lies between floating and fixed regimes. Although the theory says that a floating exchange rate regime is better, in reality there is no such thing as a fully floating currency, because it is not stable.
Factors affecting exchange rate
There are several factors that affect the exchange rate, such as:
Inflation factor
Improving inflation can affect international trade activities, affect the supply and demand of foreign currencies, and cause exchange rates to change.
Interest rate
Interest rates have a great influence on foreign securities investment activities, affecting the exchange rate.
Income
Direct impact: national income increases, the population will want to consume imported goods, so the use of foreign currency increases, causing the exchange rate to rise.
Indirect effects: high income, people will increase domestic spending, making the percentage of inflation high, so the exchange rate increases.
Trade exchange
Economic development situation: if the price of exported goods is higher than the price of imported goods, it will cause the domestic currency to rise, which will decrease the exchange rate. If the growth rate of imports is higher than that of exports, the balance of trade will decrease, causing the exchange rate to rise.
Balance of payments: a high balance of international payments will cause foreign currency to increase, domestic currency to decrease, so the exchange rate will increase, and vice versa will cause the exchange rate to decrease.
What is the exchange rate determination method?
The exchange rate can be determined by the following methods:
Determination based on gold parity
That is, compare the gold content of 2 coins with each other.
Determination based on purchasing power equilibrium
This method is based on comparing the purchasing power of two currencies.
The role of exchange rates in the economy
Exchange rates play an important role in the economy. Its functions can be mentioned as:
- A tool to compare local and foreign currency values.
- Compare the prices of domestic goods with the prices of foreign goods.
- Compare the productivity of domestic and foreign workers.
Conclusion
The above article has helped you to explain what is the exchange rate? At the same time, it also helps you see its profound and strong influence on the external economy, economic growth, balance of payments. Understanding the role of the exchange rate helps to provide solutions to stabilize the economy.
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