Foreign Exchange Rate Systems and Parity Relationships
There are two major categories of exchange rate systems:
- Flexible or Floating – laws of supply and demand determine currency value
- Fixed – the government pegs the exchange rate value and actively participates in currency markets to maintain the value
The market quotes nominal exchange rates whereby a unit of once currency can be exchanged for some amount of another currency. The real exchange rate reflects the price level differentials of the currencies being exchanged.
Real Exchange Rate Foreign/US =
Nominal Exchange Rate Foreign/US x (Price Level US / Price Level Foreign)
LESSONS
- CFA Level 2: Economics - Introduction
- Economic Growth
- Changes in Productivity: The One-Third Rule
- The Productivity Curve
- Economic Growth Theories
- Government Regulation, Deregulation, and Regulatory Behaviour
- Gross Domestic Product (Measuring Economic Activity)
- International Trade & Trade Restrictions
- Balance of Payments
- Foreign Exchange Rate Systems and Parity Relationships
- Foreign Exchange Floating Rate Systems
- Fixed Exchange Rate Systems
- Overview of Currency Markets
- Forward Exchange Rates
- Interest Rate Parity
- Purchasing Power Parity (PPP)
- International Fisher Relation
- Uncovered and Covered Interest Rate Parity Relationship
- Forecasting Exchange Rates
- CFA Level 2 Economics – Recommendations
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