Currency Exchange Systems Explained by Abubakar Irfan...

 

CURRENCY EXHANGE RATES

 

The Exchange rates between two or more currencies varies from country to country due to the implementation of different policies and in accordance with the country’s constitution. In general, there are three types of currency exchange rates in the world. These types are:

·       Fixed Exchange Rate.

·       Floating Exchange Rate.

·       Managed Exchanged Rate.

 

FIXED EXCHANGE RATE

 

The fixed exchange rate system gives the Government to decide the exchange rates of the country’s currency. Simply, A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold. For example, Kuwait uses fixed exchange rate for its currency (Kuwaiti Dinar) and the exchange rate of Kuwaiti dinar to Pkr is:

1 Kuwaiti Dinar = 935.15 Rs [current rate (it may vary)]

 

FLOATING EXCHANGE RATE

 

The floating exchange rate system means that the value of the currency depends upon the supply and demand of the currency in the market. This means that, if the demand of a country’s currency is higher and the supply is lower the value of the currency will automatically increase and if the demand is lower and supply is higher the value of the currency will automatically decrease. For example, countries like the U.S, UK, Japan use floating exchange rates for there currencies.  For many years, floating exchange rates have been the regime used by the world's major currencies – that is, the US dollar, the euro area's euro, the Japanese yen and the UK pound sterling. The exchange rates of these currencies to pkr are:

1 USD = 287.16 pkr [current rate (it may vary)]

1 Euro = 313.94 pkr [current rate (it may vary)]

1 Yen = 2.03 pkr [current rate (it may vary)]

 

MANAGED EXCHANGE RATE

 

Managed float regime is an international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies to maintain a certain range. The peg used is known as a crawling peg. Simply, the governments do allow the value of their currency to increase and decrease but only up to a certain level (for example 3 to 5 %). Managed float system is used in Mexico, Thailand, Turkey, Sweden, Israel, Brazil, and India. Exchange rates of some of these currencies to pkr are:

1 INR = 3.50 pkr [current rate (it may vary)]

1 peso = 16.79 pkr [current rate (it may vary)]

1 Thai baht = 8.27 pkr [current rate (it may vary)]

 

PAKISTANI CURRENCY (PKR) EXCHANGE RATE

 

State Bank of Pakistan since 1999 uses Flexible (floating) exchange rate for the Pakistani currency (pkr). The value of the Pakistani currency varies according to the supply and demand of the currency in the market. The currency notes and coins of pkr include:

·       1 pkr coin.

·       2 pkr coin.

·       5 pkr coin.

·       10 pkr coin.

·       10 pkr note.

·       20 pkr note.

·       50 pkr note.

·       100 pkr note.

·       500 pkr note.

·       1000 pkr note.

·       5000 pkr note.

 

WHAT IF A COUNTRY PRINTS EXTRA MONEY?

 

An important question that comes in the minds of a lot of people is that, why don’t countries print more and more currency notes to increase the amount of wealth in the country? The simplest answer to this question is Inflation and Currency value.

 

INFLATION

 

Inflation means the increase in the prices of goods in a country. Inflation in a country depends upon four factors:

·       Demand-pull.

·       Cost-pull.

·       Natural disasters.

·       Interest rates.

 

If every one in the country has enough money to buy goods than the price(value) of the goods automatically increases which ultimately leads to increase in inflation in the country.

 

CURRENCY VALUE

 

If a country prints more money than the supply of the currency increases and demand remains the same, so the value of the currency automatically decreases.

 

IMPORTANCE

 

Currency exchange systems play a crucial role in facilitating international trade, travel, and financial transactions. After examining the subject, we can draw several conclusions about currency exchange systems:

 

1. Global Interconnectedness: Currency exchange systems reflect the increasing interconnectedness of the global economy. As countries engage in cross-border transactions, the need to convert one currency into another arises. These systems enable the smooth flow of goods, services, and capital across borders.

 

2. Exchange Rate Determination: Currency exchange systems are influenced by various factors, including interest rates, inflation rates, geopolitical events, and market sentiment. Exchange rates fluctuate based on these factors, leading to the relative value of one currency against another. Supply and demand dynamics in the foreign exchange market largely determine exchange rates.

 

3. Market-Based Systems: Most currency exchange systems today operate on a market-based model. Currency markets, including the foreign exchange market (Forex), provide a platform for buyers and sellers to trade currencies. Market forces of supply and demand determine exchange rates, allowing for flexibility and liquidity.

 

4. Exchange Rate Risk: Currency exchange systems expose participants to exchange rate risk. Fluctuating exchange rates can affect the profitability of international trade, investments, and financial transactions. Businesses and individuals often employ various risk management strategies, such as hedging and forward contracts, to mitigate this risk.

 

5. Central Bank Intervention: Central banks play a significant role in currency exchange systems. They often intervene in the foreign exchange market to stabilize their domestic currency, manage inflation, or maintain competitiveness. Central bank actions, such as adjusting interest rates or buying/selling currencies, can influence exchange rates.

 

6. Transaction Costs: Currency exchange systems involve transaction costs, including spreads, commissions, and fees charged by financial institutions or currency exchange providers. These costs can vary significantly, and it is essential for individuals and businesses to compare rates and choose cost-effective options.

 

7. Technological Advancements: Advancements in technology have transformed currency exchange systems. Online platforms and mobile applications have made it easier for individuals to access currency exchange services, compare rates, and execute transactions. Blockchain technology also holds potential for enhancing transparency, security, and efficiency in cross-border payments.

 

8. Regulatory Framework: Currency exchange systems are subject to regulatory frameworks aimed at ensuring transparency, preventing money laundering, and combating illicit activities. Governments and regulatory bodies establish guidelines and monitor currency exchange providers to maintain the integrity of the financial system.

 

In conclusion, currency exchange systems are integral to global economic activities. They facilitate international trade and investment, enable individuals to exchange currencies for travel purposes, and allow financial institutions to manage their foreign currency exposure. Understanding the dynamics of currency exchange systems can help individuals and businesses make informed decisions and navigate the complexities of international finance.


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