Some of the major types of foreign exchange rates are as follows:
1. Fixed Exchange Rate
System (or Pegged Exchange Rate System).
2. Flexible Exchange
Rate System (or Floating Exchange Rate System).
3. Managed Floating
Rate System.
A fixed exchange rate system refers to a
system in which the exchange rate for a currency is fixed by the government.
1. The basic purpose of adopting this
system is to ensure stability in foreign trade and capital movements.
2. To achieve stability, the government
undertakes to buy foreign currency when the exchange rate becomes weaker and
sell foreign currency when the rate of exchange gets stronger.
3. For this, the government has to
maintain large reserves of foreign currencies to maintain the exchange rate at
the level fixed by it.
4. Under this system, each country keeps
the value of its currency fixed in terms of some 'External Standard
5. This external standard can be gold,
silver, other precious metals, another country's currency, or even some
internationally agreed unit of account.
6. When the value of a domestic currency
is tied to the value of another currency, it is known as 'Pegging"
7. When the value of a currency is fixed in terms of some other currency or terms of gold, it is known as the "Parity value of currency
2.
Flexible Exchange Rate System:
A
flexible exchange rate system refers to a system in which the exchange rate is
determined by forces of demand and supply of different currencies in the
foreign exchange market.
1. The value of currency is allowed to fluctuate freely according to changes in demand and supply of foreign exchange.
2. There is no official (Government) intervention in the foreign exchange market.
3. Flexible exchange rate is also known as a floating Exchange Rate
4. The exchange rate is determined by the market, i.e. through interactions of thousands of banks, firms and other institutions seeking to buy and sell currency for purposes of making transactions in foreign exchange.
3. Managed Floating Rate System:
Traditionally, International monetary economists focused their attention on the framework of either a fixed or a Flexible exchange rate system. With the end of Bretton Woods's system, many countries have adopted the method of Managed Floating Exchange Rates
It
refers to a system in which the foreign exchange rate is determined by market
forces and the central bank influences the exchange rate through intervention
in the foreign exchange market.
1.
It is a hybrid of a fixed exchange rate and a flexible exchange rate system.
2.
In this system, central bank intervenes in the foreign exchange market to
restrict the fluctuations in the exchange rate within certain limits. The aim
is to keep exchange rate close to desired target values
3.
For this, central bank maintains reserves of foreign exchange to ensure that
the exchange rate stays within the targeted value.
4.
It is also known as "Dirty Floating