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Exchange Rate


An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market. It is closely related to monetary policy Exchange rate is defined as the price of a nation’s currency in terms of another (foreign) currency. In another word an exchange rate is the unit of domestic currency necessary to give up to get one unit of foreign currency. There are two types of exchange rate: Fixed and Flexible.

Flexible Exchange Rate
Flexible exchange rate also called as a floating exchange rate is such an exchange rate which is determined by market forces. It is the exchange rate determined by demand for foreign currency and supply of the foreign currency in currency market. Floating rates are the most common exchange rate regime today. For example, the dollar, euro, yen, and British pound all are floating currencies with Nepalese rupee. However, since central banks frequently intervene to avoid excessive appreciation or depreciation, these regimes are often called managed float or a dirty float.

Fixed Exchange Rate
Fixed rates are those that have direct convertibility towards another currency. Fixed exchange rate is such a type of exchange rate which is determined by central bank monetary policy of a nation. In such the central bank keeps the rate from deviating too far from a target band or value. Fixed exchange rate is also called pegged exchange rate and remains constant till central bank changes the rate officially.

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