FX Rate

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FX Rate

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Exchange Rate

The value of two currencies relative to each other. For example, on a given day, one may trade one U.S. dollar for a certain number of British pounds. A currency's exchange rates may be floating (that is, they may change from day to day) or they may be pegged to another currency. A floating exchange rate is dependent on the supply and demand of the involved currencies, as well as the amount of the currency held in foreign reserves. On the other hand, a government may peg its currency to a certain amount in another currency or currency basket. For example, the Qatari riyal has been worth 0.274725 dollars since 1980.

An advantage to a floating exchange rate is the fact that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile, depending on the particular currency. Pegged exchange rates are generally more stable, but, since they are set by government fiat, they may take political rather than economic conditions into account. For example, some countries peg their exchange rates artificially low with respect to a major trading partner to make their exports to that partner artificially cheap. See also: Currency pair, Eurodollar.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
Its role is to maintain the long-term trend of FX rates whose target value is defined.
But more often, FX rates are manipulated by speculators.
A paradox at first glance, has a simple explanation: certain governments have to sell haven assets in order to accumulate dollar-denominated money liquidity to be spent supporting national FX rates (mainland China), whilst other governments, stripped of cash due to falling external trade revenues, are selling US debt in order to meet their fiscal targets (Saudi Arabia), Sputnik reported.
For instance, Patton [35] constructs time-varying copula models to examine the dependence between two FX rates, that is, Deutsche Mark/US Dollar (DM/USD) and Japanese Yen/US Dollar (JPY/USD).
Joseph and Vezos (2006) on their study on the understanding of stock returns to exchange rates in US banks and found strong deviation in FX rate sensitivity by financial division of banks.
Identifying and planning for FX rate effects has become more significant with the increased volatility during the last three years.
FX rate swaps are one of the most commonly traded instruments and involve two transactions, one at initiation where one currency is purchased at the current spot rate and a second where the initial transaction is reversed at a specified future date at an agreed exchange rate.
Citibank Korea (NYSE: C) has announced that it has implemented a plan called the 'Citi Card Overseas Travel' event for winter travellers, which is a preferential FX rate promotion and air ticket discount event for the bank's credit card customers.
Unfortunately, FX rate changes cannot always be anticipated and hedging has risks and costs.
For example, sales in Sterling (GBP) for 2004 might have been budgeted against an internal Fx rate of USD 1.70.
FX rate hikes, for example, will pay off the $800,000 an episode the web paid for "NYPD Blue" reruns.
The recent availability of ultra-high frequency FX rate data provides an opportunity to test this hypothesis more carefully.