What Is Foreign Exchange Rates

It seems that the term foreign exchange rate is familiar, but it turns out that this understanding of the exchange rate is often misunderstood by most people. The exchange rate is a medium of exchange for goods and services between countries so that this exchange rate is felt by businesses in international trade such as exports and imports. Then what is meant by foreign exchange rates? Check out the following review.

What is Foreign Exchange?

The exchange rate is the price or value of a country’s currency measured by foreign currencies when shopping or buying goods abroad. In essence, the exchange rate is the exchange rate. While foreign exchange is the value of another country’s currency.

So, the foreign exchange rate is the ratio of the value of the domestic currency to other currencies or in other words the exchange rate shows the comparison of values ​​between two different currencies.

Foreign Exchange System

There are several types of methods used by the government in determining the value of foreign currency builders.

  • Fixed Exchange Rate System ( Fixed Exchange Rate )

The fixed exchange rate system is a condition of the exchange rate of the domestic currency determined by the government. So the government takes various steps and policies to regulate the value of a currency at a certain price. All fluctuations in price movements can be muted by the government or in other words intervened.

This system also means that foreign exchange rates are determined by the central bank that is actively involved in each transaction. However, the bank cannot change its own exchange rate because there is a connection with the government. If the bank deviates and does not meet the standards, it will be sanctioned.

  • Floating Exchange Rate

The free exchange system is the creation of a separate exchange rate for requests and offers from foreign currencies, so that the government does not interfere in determining the exchange rate to be exchanged. 

In this system, the exchange rate is left to the market mechanism. High and low currencies are determined by the level of demand and supply of the currency itself. 

  • Floating Exchange Rate System Under Control or Controlled ( Floating Exchange Rate )

A controlled exchange rate system is a system where the government and the market have the same freedom in determining the exchange rate of a currency. So that the exchange rate can move freely up or down. The government’s use here is to avoid sharp turmoil.

Things done by the government such as:

  • Floating Dirty ( Dirty Floating )

The government intervenes directly by selling or buying foreign exchange.

  • Floating Clean ( Clean Floating )

The government intervenes indirectly, for example by regulating interest rates.

Foreign Exchange Function

  • International Exchange and Payment Tools

Of course, this is the foreign exchange rate as an international medium of exchange. Foreign exchange is used as a tool to exchange goods or services with other countries. For example, Indonesia imports electronic goods from China, so the Chinese must be paid in dollars because they will not want to if they are paid in rupiah. 

  • Exchange Rate Control Devices

A country’s currency exchange rates often experience upheaval. By managing the level of use of a particular foreign exchange, a country can control the exchange rates of their currencies more easily. For example, with the exchange rate of Rupiah to Dollar, it can be seen that the rupiah exchange rate is increasing or decreasing. In this case, the exchange rate is used as a benchmark to control the value of a country’s currency.

  • Streamlining International Trade 

With the existence of foreign exchange rates, every country in all corners of the world can easily buy and sell without constrained currency in their respective countries. 

Types of Foreign Exchange Rates

  • Selling Rate

Price given by a bank to someone who wants to buy a foreign currency.

  • Buying rate

Price given by a bank to someone who wants to exchange foreign currency.

  • Middle Rate

The price given by the bank between the selling rate and the buying rate (the sum of the buying and selling rates divided by two).

Calculation of Foreign Exchange Rates

One day Budi got an assignment in his job, which was covering the news to the United States. He received benefits from services with travel expenses of Rp.47,500,000.00.

At that time, the prevailing exchange rate was the
Selling Rate of Rp.9,500 per US $ 1
Buy Rate of Rp.9,200 per US $ 1

So, how much pocket money does Azizah have in dollars?

If Budi is going to exchange rupiahs for dollars, the calculation used is the selling rate calculation. So, Budi’s money in dollars is:
Rp.47,500,000: Rp9,500 = US $ 5,000

While in America, Budi uses only US $ 3,000. And after returning to America, Budi returned to exchange the remaining money with rupiah. And the prevailing exchange rate at that time was the selling rate of Rp.9,750 per US $ 1 and the buying rate of Rp.9,425 per US $ 1.

What is the amount of rupiah that will be received by Budi?

And Budi’s remaining money is US $ 5,000 – US $ 3,000 = US $ 2,000. If Budi is going to exchange dollars into rupiah, the calculation used is the calculation of the buying rate. So, the remaining money owned by Budi in rupiah amounted to: US $ 2,000 x Rp.9,425 = Rp. 18,850,000.00.

If you are a businessman who conducts transactions between countries, of course you must always update the value of foreign exchange rates. Therefore, you must have an accounting system that can document each of your business transactions

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