Business, Legal & Accounting Glossary
A foreign exchange rate is the rate at which one currency is converted into another. It is also known as the rate of exchange. A currency price is dependent on several factors. These include relative inflation, interest rate differentials, growth of the economy, debt, deficit and export competitiveness. Some of the developed nations of the world maintain a “floating” exchange rate.
In a floating exchange rate, the currency rate is not fixed and changes with change in the condition of the market. Fluctuating exchange rates have a significant impact on the profit earned by multinational corporate houses.
The floating exchange rate is the currency exchange rate ascertained by free-market forces. An ideal floating exchange rate will be independent of any government control. Value of currency is set through the foreign exchange market where it is influenced by demand and supply vis-a-vis other currencies. A currency that employs a floating exchange rate is known as a floating currency.
A floating exchange rate is termed ‘self-correcting’ as any imbalance in demand and supply will mechanically be corrected in the market. For example, low demand for a particular currency will lower its value and make imported goods dearer. This will stimulate demand for locally produced goods and services. More jobs will be created as a consequence. A floating exchange rate is always changing in tune with economic fluctuations.
There is no ideal floating exchange rate in the real world. No currency is fully floating. The central bank of any country intervenes for currency stabilization when extremes of currency appreciation and depreciation occur. This type of controlled currency exchange is known as a ‘managed float’. The central bank may permit the country’s currency to float freely between a price ceiling and floor.
A floating exchange rate may increase foreign exchange volatility. This poses a grave problem for countries with emerging economies. Liabilities are denominated in foreign currencies while assets are held in local currency. Sudden depreciation in the exchange rate leads to instability in the domestic financial system of any emerging economy country.
It is a system where two parties interchange certain amounts of unlike currencies. A series of interest payments based on the initial cash flows are exchanged. One party may pay a floating exchange rate while the other may pay a fixed interest rate. Principal amounts are paid back when the swap attains maturity. Both principal and interest are fully exchanged in a currency swap.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Floating Exchange Rate are sourced/syndicated and enhanced from:
This glossary post was last updated: 27th March, 2020 | 3 Views.