exchange rate_what is exchange rate

The exchange rate, also known as ” foreign exchange market or exchange rate”, is the most important adjustment lever in international trade. The rate at which one country’s currency is exchanged for another country’s currency is the price at which one currency is expressed in another. Since the names of currencies in the world are different and the currency values ​​are different, the currency of one country must specify an exchange rate for the currencies of other countries, that is, the exchange rate.

cause

The reason why the currencies of various countries can be compared and can form a parity relationship with each other is that they all represent a certain amount of value, which is the basis for determining the exchange rate. Under the gold standard system, gold is the standard currency. The currency units of the two countries that implement the gold standard system can determine the ratio between them according to their respective gold content, that is, the exchange rate.Under the paper currency system, various countries issue paper currency as the representative of metal currency, and refer to the past practice to stipulate the gold content of paper currency by law, which is called gold parity. The comparison of gold parity is the basis for determining the exchange rate between the two countries. However, banknotes cannot be converted into gold, so the legal gold content of banknotes is often useless. Therefore, in a country with an official exchange rate, the national monetary authority (the Ministry of Finance, the central bank or the foreign exchange management authority) sets the exchange rate, and all foreign exchange transactions must be carried out according to this exchange rate. In countries that implement market exchange rates, exchange rates change with the supply and demand of currencies in the foreign exchange market. The exchange rate has an impact on the balance of payments, national income, etc.

effect

1.Exchange rate and import and export

Generally speaking, a fall in the exchange rate of the local currency, that is, the depreciation of the foreign currency of the local currency, can play a role in promoting exports and inhibiting imports; if the exchange rate of the local currency rises, that is, the ratio of the domestic currency to the outside world increases, it is conducive to imports, not conducive to exports.

2.Exchange rates and prices

From the perspective of imported consumer goods and raw materials, the decline in the exchange rate will cause the domestic price of imported goods to rise. As for its impact on the general price index, it depends on the proportion of imported goods and raw materials in the gross national product. On the contrary, if the local currency appreciates and other conditions remain unchanged, the price of imported products may decrease, which can restrain the overall price level.

3.Exchange rates and capital inflows and outflows

Short-term capital flows are often greatly affected by exchange rates. When there is a tendency for the local currency to depreciate, domestic and foreign investors are reluctant to hold various financial assets denominated in the local currency, and will convert them into foreign exchange, resulting in capital outflows. At the same time, due to the exchange of foreign exchange in succession, the tight supply and demand of foreign exchange will aggravate the domestic currency exchange rate to fall further. On the contrary, when there is a trend of appreciation of the local currency, domestic and foreign investors will try to hold various financial assets denominated in the local currency, which will lead to capital inflows. At the same time, as foreign exchange has been converted into the local currency, the oversupply of foreign exchange will promote the further rise of the local currency exchange rate.

type:

(1) According to the evolution of the international monetary system, there are fixed exchange rates and floating exchange rates

1. Fixed exchange rate. Refers to the exchange rate that is for
2. mulated and announced by the government and can only fluctuate within a certain range.
3. Floating exchange rate. Refers to the exchange rate determined by market supply and demand. Its fluctuation is basically free, and a country’s currency market has no obligation to maintain the exchange rate level in principle, but it can intervene when necessary.

(2) According to the method of formulating exchange rate, there are basic exchange rate and hedging exchange rate

1. Basic exchange rate. Countries must choose a country’s currency as the main comparison object when formulating exchange rates, and this currency is called the key currency. According to the comparison of the actual value of the domestic currency and the key currency, the exchange rate for it is formulated, and this exchange rate is the basic exchange rate. Generally, the U.S. dollar is the most widely used currency in international payments. All countries regard the U.S. dollar as the main currency for setting exchange rates, and often use the exchange rate against the U.S. dollar as the basic exchange rate.
2. Set the exchange rate. Refers to the exchange rate calculated by countries based on the basic exchange rate against the US dollar that directly reflects the value ratio between other currencies.

(3) According to the perspective of banks buying and selling foreign exchange, there are buying exchange rates, selling exchange rates, intermediate exchange rates and cash exchange rates

1. Buy the exchange rate. Also known as the purchase price, that is, the exchange rate used by banks to buy foreign exchange from peers or customers. When the direct quotation method is adopted, the exchange rate with the smaller amount of the foreign currency converted into the local currency is the purchase price, and the opposite is true when the indirect quotation method is adopted.
2. Selling rate. Also known as the selling price, that is, the exchange rate used by banks to sell foreign exchange to peers or customers. When the direct quotation method is adopted, the exchange rate that converts the foreign currency to the local currency is the selling price, and the opposite is true when the indirect quotation method is adopted.
3. There is a price difference between buying and selling, which is the income of banks buying and selling foreign exchange, generally 1% to 5%. The buying and selling exchange rates used when buying and selling foreign exchange between banks are also called inter-bank buying and selling exchange rates, which are actually the buying and selling prices in the foreign exchange market.
4. Intermediate exchange rate. is the average of the bid and ask prices. The middle exchange rate is often used when reporting exchange rate news in Western magazines, and the calculated exchange rate is also calculated using the intermediate exchange rate of the relevant currency.
5. Currency exchange rate. Most countries stipulate that foreign currencies are not allowed to circulate in their own countries. Only by converting foreign currencies into the national currency can they buy domestic goods and services. Therefore, the exchange rate for buying and selling foreign currency cash is generated, that is, the cash exchange rate. In principle, the exchange rate of cash should be the same as the foreign exchange rate. However, due to the need to transport foreign currency cash to various issuing countries, it will cost a certain amount of freight and insurance to transport foreign currency cash. Therefore, the exchange rate of the bank when accepting foreign currency cash It is usually lower than the exchange rate for foreign exchange purchases; and the exchange rate used by banks to sell foreign currency cash is higher than the exchange rate for other foreign exchange sales.

(4) According to the bank’s foreign exchange payment method, there are telegraphic transfer exchange rate, letter exchange rate and bill exchange rate

1. Telegraphic transfer rate. The exchange rate of telegraphic transfer is an exchange rate used by a domestic bank that operates foreign exchange business after selling foreign exchange, and entrusts its foreign branch or agency bank to pay the recipient by telegram. Due to the fast payment by wire transfer, the bank cannot occupy the customer’s capital position. At the same time, the international wire transfer fee is relatively high, so the wire transfer exchange rate is higher than the general exchange rate. However, the speed of fund transfer by wire transfer is fast, which is conducive to accelerating the turnover of international funds. Therefore, wire transfer occupies a large proportion in foreign exchange transactions.
2. Credit exchange rate. The letter exchange rate is an exchange rate used by the bank to issue a payment authorization letter and send it by letter to the bank at the place of payment to transfer the payee to the payee. Since it takes a certain time for the mailing of the payment authorization letter, the bank can occupy the customer’s funds during this period, so the exchange rate of letter remittance is lower than that of wire transfer.
3. bill exchange rate. The draft exchange rate refers to the exchange rate at which a bank opens a draft paid by its foreign branch or agent bank to the remitter when it sells foreign exchange, and then the bank can bring it or send it abroad to withdraw money. Since there is a period of time between the sale of foreign exchange and the payment of foreign exchange for bills, the bank can occupy the customer’s position during this period, so the exchange rate of bills is generally lower than that of wire transfers. Bills are divided into short-term bills and long-term bills, and their exchange rates are also different. Because the bank can use customer funds for a longer period of time, the long-term bill exchange rate is lower than the short-term bill exchange rate.

(5) According to the delivery period of foreign exchange transactions, there are spot exchange rates and forward exchange rates

1. Spot exchange rate. Also known as the spot exchange rate, it refers to the exchange rate at which delivery is made on the same day or within two days of the transaction between buyers and sellers of foreign exchange.
2. forward exchange rate. The forward exchange rate is the exchange rate for which the delivery will be carried out in a certain period of time in the future, and the buyer and the seller will sign a contract and reach an agreement in advance. When the delivery date is reached, the two parties to the agreement will make two clearings according to the exchange rate and amount booked. Forward foreign exchange trading is a kind of reservation transaction, which is caused by the time required by foreign exchange buyers for foreign exchange funds and in order to avoid the risk of foreign exchange rate fluctuations. The exchange rate of forward foreign exchange is different from the spot exchange rate. This difference is called forward spread, and there are three situations: premium, discount, and parity. Premium means that the forward exchange rate is more expensive than the spot exchange rate, and discount means that the forward exchange rate is cheaper than the spot exchange rate, and parity means that the two are equal.

(6) According to the leniency and strictness of foreign exchange management, there are official exchange rates and market exchange rates

1. Official exchange rate. Refers to the exchange rate published by a state agency (Ministry of Finance, Central Bank or Foreign Exchange Authority). The official exchange rate can be divided into single exchange rate and multiple exchange rate. Multiple exchange rates are more than one foreign exchange rate stipulated by a country’s government for its own currency, and it is a special form of foreign exchange control. Its purpose is to reward exports, restrict imports, and restrict the inflow or outflow of capital to improve the balance of payments.
2. market exchange rate. Refers to the actual exchange rate at which foreign exchange is bought and sold in the free foreign exchange market. In countries with loose foreign exchange management, the officially announced exchange rate often only plays the role of the central exchange rate, and actual foreign exchange transactions are conducted at the market exchange rate.

(7) According to bank business hours, there are opening exchange rate and closing exchange rate

1. Opening exchange rate. Also known as the opening price, it is the exchange rate used by foreign exchange banks for foreign exchange transactions when they start business on a business day.
2. The closing exchange rate. Also known as the closing price, the exchange rate used by foreign exchange banks at the end of foreign exchange transactions on a business day