fixed exchange rate

(noun)

Sometimes called a pegged exchange rate, a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.

Related Terms

Examples of fixed exchange rate in the following topics:

  • International Exchange of Money

    • For several centuries the developed world operated under a fixed exchange rate system based on the gold standard.
    • After the depression in the 1930s, many systems were tried, but the developed world chose to switch back to a fixed exchange rate system after WW II.
    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.
    • The spot exchange rate refers to the current exchange rate.
    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.

  • Balance of Payments

    • All the activities listed above are sources of foreign exchange because foreigners are paying the U.S. so the total would be $4.5 billion.
    • Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies.
    • Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate).
    • The central bank does not intervene with a pure float to protect or devalue its currency, it allows the rate to be set by the market.
    • The central bank's foreign exchange reserves do not change.

  • Exchange Rates

    • A foreign currency exchange rate between two currencies is the rate at which one currency will be exchanged for another.
    • Exchange rates are determined in the foreign exchange market.
    • For example, the currency may be free-floating, pegged or fixed, or a hybrid.
    • A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency.
    • China was not the only country to do this; from the end of World War II until 1967, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.

  • The International Monetary Fund (IMF)

    • The IMF seeks to promote international economic cooperation, international trade, employment, and exchange rate stability.
    • The IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the world's international payment system post-World War II.
    • The organization's stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs.
    • Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of changes in procedures rather than through the adoption of new obligations.The responsibilities of the fund changed from those of guardian to those of overseer of members' policies.
    • IMF conditionality is a set of policies or "conditions" that the IMF requires in exchange for financial resources.

  • Debt Finance

    • Public debt is a general definition covering all financial instruments that are freely trade-able on a public exchange or over the counter, with few if any restrictions.
    • It consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with the amount to be repaid by a certain date.
    • Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over thirty years, being less common.
    • A risk-free rate is also commonly used in setting floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor (in other words, the risk of him or her defaulting and the creditor losing the debt).
    • In reality, no lending is truly risk free, but borrowers at this rate are considered the least likely to default.

  • Global finance: initial considerations

    • The price of one country's currency in units of another country's currency is known as a foreign currency exchange rate.
    • Exchange rates can be quoted in two ways.
    • If an exchange rate is an indirect quote, the exchange rate is stated as the number of foreign units per one unit of domestic currency (Beenhakker, 2001).
    • Currency risk is the potential consequence from an adverse movement in foreign exchange rates (Coyle, 2000).
    • Currency risk arises because exchange rates are volatile in the short and the long-term and the future movements of exchange rates cannot be predicted.

  • The political/legal environment

    • The exchange rate of a particular nation's currency represents the value of that currency in relation to that of another country.
    • Governments set some exchange rates independently of the forces of supply and demand.
    • If a country's exchange rate is low compared to other countries, that country's consumers must pay higher prices on imported goods.
    • While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exporters and importers.

  • Functions of Money

    • After World War II, at the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the U.S. dollar.
    • In turn, the U.S. dollar was fixed to gold.
    • When money is used to intermediate the exchange of goods and services, it is performing the function of a medium of exchange.
    • To be widely acceptable, a medium of exchange should have stable purchasing power.
    • Gold was popular as a medium of exchange and store of value because it was inert.

  • Secured vs. Unsecured Funding

    • A loan constitutes temporarily lending money in exchange for future repayment with specific stipulations such as interest, finance charges, and/or fees.
    • The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.
    • The interest rates applicable to these different forms may vary depending on the lender and the borrower.
    • Due to the increased risk involved, interest rates for unsecured loans tend to be higher.
    • Typically, the balance of the loan is distributed evenly across a fixed number of payments; penalties may be assessed if the loan is paid off early.

  • Differential

    • In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (re-selling) to prevent arbitrage, price differentials can only be a feature of monopolistic and oligopolistic markets, where market power can be exercised.
    • However, product heterogeneity, market frictions, or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets.
    • The boundary set up by the marketer to keep segments separate is referred to as a rate fence.