Exchange Rate Management Systems (Regimes)

1. The Flexible (Floating) Exchange Rate System

The spot price of foreign currency is market-driven, determined by the
interaction of private demand and supply for that currency. The market clears
itself through the price mechanism.

Under the Flexible Exchange Rate System:

• A fall in the market price (the exchange rate value) of a currency is called a
depreciation of that currency.
• A rise in the market price (the exchange rate value) of a currency is called
an appreciation of that currency

2. The Fixed Exchange Rate System

Fixed exchange rates are not permitted to fluctuate freely on the market or
to respond to daily changes in demand and supply. Exchange variations,
triggered by changes in the demand and/or supply are permitted only within the
band (or spread). Central banks maintain the band through Commercial Bank
interventions.

Under the Fixed Exchange Rate System:

• A discrete official reduction in the otherwise fixed par value of a currency
is called a devaluation.
• A discrete official increase in the otherwise fixed par value of a currency is
called a revaluation.

3. The Managed Float Exchange Rate System

Central banks intervene in the foreign exchange markets to influence the
exchange rate in a direction they consider desirable. This system is sometimes
referred to as a dirty float.

Exchange Controls
Exchange controls refer to arrangements by which governments attempt to
control purchases and sales of currencies by individuals and firms. Through
rules, regulations, and price manipulations, exchange controls attempt to
influence those who buys and sells currencies, in what quantities, at what prices,
and for what purposes.
Objectives and Purposes of Exchange Rate Management

The main objective of India's exchange rate policy is to ensure that economic
fundamentals are reflected in the external value of the rupee. Subject to this
predominant objective, the conduct of exchange rate policy is guided by three
major purposes

First, to reduce excess volatility in exchange rates, while ensuring that the market
correction of overvalued or undervalued exchange rate is orderly and calibrated

Second, to help maintain an adequate level of foreign exchange reserves

Third, to help eliminate market constraints with a view to the development of a

healthy foreign exchange market

Exchange rate Quotes

In finance, the exchange rates (also known as the foreign-exchange rate, forex
rate or FX rate) between two currencies specify how much one currency is worth in terms
of the other. It is the value of a foreign nation’s currency in terms of the home nation’s
currency. For example an exchange rate of 50 Indian rupees (INR) to the United States
dollar (USD, $) means that INR 50 is worth the same as USD 1. The foreign exchange
market is one of the largest markets in the world.
Conversion Rate is the ratio at which one currency can be exchanged for another. For
example, a conversion rate for euros to dollars of 1.25 means that one euro can convert to
1.25 dollars. A high conversion rate between currencies means that one currency can
"buy" more units of the other. If one euro can be converted into more than one U.S. dollar
then the dollar has a lower value relative to the euro. Also, commonly referred to as the
exchange rate. The conversion rate depends on several factors, one of which is the
interest rate set by the currency's issuing central bank compared to the interest rate set by
the bank of the currency being converted into. Countries with high real interest rates
typically attract investors from other countries and thus have an increased demand and
higher value for their currency.

The spot exchange rate refers to the current exchange rate.

The forward exchange rate refers to an exchange rate that is quoted and traded today
but for delivery and payment on a specific future date.
Direct quote: 1 foreign currency unit = x home currency units

Indirect quote: 1 home currency unit = x foreign currency units

Cross Rate: The currency exchange rate between two currencies, both of which are not
the official currencies of the country in which the exchange rate quote is given in. This
phrase is also sometimes used to refer to currency quotes which do not involve the U.S.
dollar, regardless of which country the quote is provided in. For example, if an exchange
rate between the Euro and the Japanese Yen was quoted in an American newspaper, this
would be considered a cross rate in this context, because neither the euro or the yen is the
standard currency of the U.S. However, if the exchange rate between the euro and the
U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate
because the quote involves the U.S. official currency.