INTERMEDIATE ARRANGEMENTS FOR DETERMINATION OF EXCHANGE VALUES

There are many intermediate arrangements for determination of exchange values. These arrangements are being listed below:

A) Domestic currency pegged to one foreign currency

Under this arrangement, the exchange rate of one currency is pegged to a dominant foreign currency, usually the U.S. dollar. For example the Argentine peso was till recently pegged to the US dollar in the ratio 1:1, due to the economic depression that started in the year 1999.

B) A currency pegged to a basket of currencies

The currency of a country may be pegged to a basket of currencies. The basket is generally formed by the currencies of major trading parties to make the pegged currency more stable than if a single currency peg is used. Trade, services and major capital flows may be used as currency weights while calculating the basket. The Indian Rupee is linked to a basket of currencies.

C) Flexibility limited in terms of a single currency

In this system, the value of the currency is maintained within certain margins of the peg. Some Middle Eastern countries follow this system and maintain their currency within a limit of the per against the U.S. dollar.

D) Pegged to some indicators

Under this arrangement, the currencies adjust more or less automatically to changes in the selected indicators. A common indicator is the real effective exchange rate (REER) that reflects inflation adjusted changes in the currency against major trading parties.

This category also includes cases where the exchange rate is adjusted according to a pre-announced schedule.

E) Managed Float

Central bank of a country decides the exchange rate in this system. The rates are revised from time to time depending on forex reserves, developments in parallel exchange markets, the real effective exchange rate etc.

F) Independent Float

In this system market forces determine the exchange rate. Most of the developed countries follow this system of exchange rate.

Currencies in the foreign exchange market may be transacted for immediately delivery or for a postponed delivery and consequently, there are two types of rates in the market. These are Spot Exchange Rates and Forward Exchange Rates.