Foreign Exchange Rates

This time we will discuss the meaning of foreign exchange rates and the systems, types and calculations of foreign exchange rates based on prevailing exchange rates. The following is the explanation …

 

Table of contents :

Definition of Foreign Exchange Rates

Exchange rate

Foreign exchange

Foreign Exchange Rate System

  1. Fixed Exchange Rate System
  2. Free / Floating Exchange Rate System (floating exchange rate)
  3. Managed Floating Rate System

Types of Foreign Exchange Rates

Calculation of Foreign Exchange Rates

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Definition of Foreign Exchange Rates

Exchange rate

Exchange rate is the price or value of a country’s currency which is measured in foreign currency when shopping or buying goods abroad.

 

The thing that needs to be considered and made the most important thing is the exchange rate, because the exchange rate will inform the prices of various countries into our country’s currency.

 

Foreign exchange

Foreign exchange is the currency of another country. Currency that is exchanged for another currency is called a foreign exchange (forex) transaction, that is, the value of currency compared to other currencies is called the exchange rate or currency exchange rate.

 

Forex is the currency of a country that is issued and converted into a legal payment instrument in another country.

 

If a currency can be exchanged for another currency indefinitely, the foreign currency exchange will have value.

 

The meeting place between the supply and demand for foreign exchange is called the Foreign Exchange Market.

 

The price of a currency that is to be exchanged for another currency is called the foreign currency exchange rate.

 

So the Foreign Exchange Rate is the ratio of the value or price between the foreign currency declared or exchanged with the value of the domestic currency.

 

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Foreign Exchange Rate System

understanding of foreign exchange rates

 

There are several types of ways in which governments determine foreign currency exchange rates. These methods include:

 

  1. Fixed Exchange Rate System

This is a condition in which the domestic currency exchange rate is determined by the government. In this type, the government takes various steps and policies to regulate the value of its currency at a certain price.

 

Government / intervention will reduce fluctuations in price movements.

 

If there is an excess supply, the government will buy it. Conversely, if there is excess demand for a particular foreign currency, the government will sell its supply of currency.

 

This system is able to provide certainty about currency exchange rates, but the weakness is that the government must have enormous foreign exchange reserves to maintain the value of its currency.

 

  1. Free / Floating Exchange Rate System (floating exchange rate)

In this system, the amount of the exchange rate is left to the market mechanism without government intervention. The highs and lows of a currency are determined by the level of supply and demand for the currency itself.

 

  1. Managed Floating Rate System

This is a combination of the two systems above. Exchange rates can move freely up or down, but the government will intervene to avoid fluctuations that are too sharp.

 

The government intervenes to intervene when prices reach a certain threshold, for example 5% above or below the equilibrium level.

 

Intervention or intervention can be in the form of:

 

Dirty Floating – is a condition in which the government intervenes directly by selling or buying foreign currency.

Clean Floating (net floating) – is a condition in which government intervention is carried out indirectly, for example by setting interest rates.

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Types of Foreign Exchange Rates

There are three types of foreign exchange rates that we need to know:

 

Selling Rate –  is the price given by a bank to someone who wants to buy foreign currency

Buying rate  – is the price given by a bank to someone who wants to exchange foreign currency.

Middle rate –  is the price given by the bank between the selling rate and the buying rate (the sum of the buying and selling rates is divided by two)

Calculation of Foreign Exchange Rates

Now we will calculate the foreign exchange rate based on the prevailing exchange rate. Example:

Question :

One day Azizah got an assignment in her job, covering the news in the United States. He receives an allowance from the service with a travel fee of Rp. 38,000,000.00. At that time, the prevailing exchange rate is

 

Sales rate of Rp.9,500 per US $ 1

 

Buy the exchange rate of Rp. 9,200 per US $ 1

 

How much pocket money did Azizah receive in dollars?

 

Meanwhile in America, Azizah only spent US $ 3,000. And after returning to America, Azizah returned to exchange the remaining money into rupiah.

 

And the prevailing exchange rate at that time was the selling rate, which was Rp. 9,750 per US $ 1 and the buying rate was Rp. 9,425 per US $ 1.

 

How much rupiah will Azizah receive?

 

Answer:

 

If Azizah is going to convert rupiah to dollars, the calculation used is the calculation of the selling rate. So, Azizah’s money in dollars is equal to:

Rp. 38,000,000: Rp. 9,500 = US $ 4,000

 

And Azizah’s remaining money is US $ 4,000 – US $ 3,000 = US $ 1,000. If Azizah is going to exchange dollars into rupiah, the calculation used is the calculation of the buying rate. So, the remaining money that Azizah has in rupiah is the same as:

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US $ 1,000 x Rp. 9,425 = Rp. 9,425,000.00.

Also Read:

Financial Accounting and Objectives

Definition of Tax Accounting

Definition of Holding Company

Definition of Fiscal Policy

This is the discussion on the meaning of foreign exchange rates and the systems, types and calculations of foreign exchange rates based on the prevailing exchange rates. Hopefully helpful, and thank you.

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