Episode 78: International Business: Exchange Rates

Foreign exchange rates are very important in the well being of the whole world’s economy as well as those of individuals, companies and central banks of many countries. They are defined as the value of one currency in terms of another. Even though foreign exchange rates are very important pieces of information that should be known by everyone, this is usually far from the case.

One thing that many people wonder about is the criteria used in deducting the foreign exchange rate of one currency against another. For example the euro currently has a higher foreign exchange rate than the dollar and this means that any quantity of dollar will be equivalent to a lesser quantity of the European currency.

There are two main methods used to deduct the foreign exchange rate of a currency namely fixed method and floating method. The fixed method of foreign exchange rate deduction is the practice of a country’s central bank announcing a stable figure as the official foreign exchange rate of their currency. This method is very popular among countries such as India where its central bank sets an official figure for their currency and tries to maintain that figure by actively trading in its currency so its predetermined rate will not be at the mercy of the forces in the currency markets. The specific foreign exchange figure is arrived at after a critical comparison with major world currencies such as the Euro and US dollar.

The floating method of foreign exchange rate deduction is the most popular method in many countries around the world. There is usually limited governmental interference and the price of a currency is basically deducted from how popular a specific currency is and the amount of money people are willing to pay for it. This is usually created by the good old forces of marketing known as demand and supply. However this method can make the foreign exchange rate of a currency very volatile due to the high influence of rumors and speculation on the rates which could be created artificially by an unscrupulous group of people for their own benefits.

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