In today’s volatile base currency market, what is the exchange rate is always a question that many people are interested in. Faced with the economies of countries around the world at present and in the future, the exchange rate plays an extremely important role in the economy as well as the way companies and economies of the countries around the world operate. world. When transferring money or depositing money into a foreign currency account, we always need to know exchange rate how.
Therefore, you need to learn about the concept of Exchange rate. How to classify popular exchange rates according to criteria? Let’s find out in the article below!
What is the exchange rate?
An exchange rate is the price at a time when the currency of one country or region can be converted to the currency of another country or region. Accordingly, the exchange rate is calculated by the number of local currency units per foreign currency unit. When the exchange rate falls, it means that the domestic currency appreciates and the foreign currency depreciates, conversely, when the exchange rate increases, the domestic currency decreases and the foreign currency appreciates.
For example: The exchange rate between VND and USD will be officially quoted as USD/VND with the meaning of how many VND units can be exchanged for one USD unit.
Types of exchange rates commonly used today
About exchange rates we hear a lot about exchange rates, foreign exchange rates, etc. However, we only talk about 4 common types of exchange rates that you need to know.
There are also many classification methods depending on the appropriate type. Usually it will be based on criteria such as transaction operations, quote market, futures or the relationship between currencies in the world today.
Let’s see what these 4 types of exchange rates are.
According to the transaction
There are 2 types: buying rate and selling rate.
Is the price the subject is quoted, they are willing to pay to buy a unit of the base currency. Easier to understand is the rate the bank uses to buy foreign currency from customers, or the rate at which customers sell foreign currency to the bank.
Assume: The exchange rate between Vietnam dong and the dollar is 23,155. This means that 1 USD will be exchanged for 23,200 VND.
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For example: At Eximbank listing the price on July 8, 2019, the USD cash buying rate is 23,180 and the USD cash selling rate is 23,290.
The price the subject is willing to exchange for one unit of the base currency in exchange for the quote currency. That is, the rate the bank uses to sell foreign currencies to customers, or the rate at which customers buy foreign currencies from the bank.
There are also interbank rates with the participation of banks with each other.
According to the quote market
Exchange rates can be classified into the following types:
- Official Rates: published by the monetary authority (Central Bank). This rate is usually applied for a certain period of time.
- Market rate: formed by the supply – demand basis of the current market.
In countries that maintain fixed exchange rates, official and market rates coexist.
In which, the official exchange rate serves as the basis for the exchange rate listed at commercial banks and fluctuates within a permissible margin, while the free market rate is not under the control of this bank.
Therefore, in each period, each country has a different quote. For countries with a floating exchange rate regime, the central bank does not publish an official exchange rate, so the exchange rate is completely determined by the market.
Can be classified into:
- Spot Rates: is applied to foreign currency trading contracts that are executed after 2 working days from the transaction start date.
- Forward rate: is the rate in a contract that is determined for a long time as signed today but is determined at another time in the future. Depending on the provisions of the contract, the exchange rate will change according to fluctuations from time to time when executing or staying the same as when signing the contract.
According to the relationship between currencies
This is considered the most standard and most important classification, applied for the purposes of studying competitiveness in trade between countries.
Exchange rates between currencies are not the same, so in the process of understanding the competitiveness between goods and services, researchers often use exchange rate indexes for easy comparison with the purpose of reducing same origin time.
Rate indexes include:
- Bilateral Nominal Exchange Rate Index: represents the nominal purchasing power of two currencies and does not take into account fluctuations in the price of goods in two different countries
- Bilateral real exchange rate index: is the nominal exchange rate adjusted for relative prices between the two countries.
Currently, in the open economy, determining the exchange rate is very important. The impact of exchange rates on entities involved in transactions and conversions on the foreign exchange market is also quite exciting.
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When the exchange rate changes, it will lead to a change in the supply and demand of foreign currencies in the market. That has a great impact on economic variables such as national income, unemployment, and inflation.
Rates in use today
As defined, the exchange rate is the price at which the currency of one country can be converted to the currency of another country at a specified time. The exchange rate will be calculated in units of local currency per unit of foreign currency.
From the definition, we can determine the exchange rates that countries including Vietnam are using commonly as follows:
The interbank rate is the rate established on the interbank market (trading market only for large-scale organizations, banks and enterprises), this is a tool for the State Bank to check and control the buying and selling rates of banks.
Understanding the interbank rate factors is important to bring many benefits in business as well as investment.
Market regulations regulate the exchange rate between banks around +/-% compared to the interbank rate announced by the State Bank. Normally, the bank rate will be the basis for businesses to account for the exchange rate.
Foreign exchange rate is the exchange rate between foreign currency and local currency, this rate tells us how many units of the local currency can be exchanged for one unit of foreign currency. This is an important variable to determine the foreign exchange rate. Depending on the needs, people are interested in a certain aspect of the foreign exchange rate.
Therefore, you need to understand how foreign exchange rates are classified before you find out how foreign exchange rates are determined.
Currently, there are two main ways of determining foreign exchange rates:
- Determining foreign exchange rates on the basis of comparison of purchasing power parity
- Determine the foreign exchange rate based on the gold content between two currencies.
In today’s society with an open economy, the determination of foreign exchange rates is extremely important, because they affect the subjects and subjects participating in transactions in the foreign exchange market, which are also quite active and growing. crowded.
Changing foreign exchange rates means that the supply and demand in the market changes. Since then, it has produced an astonishing array of effects on economic variables such as income, nationality, unemployment, and inflation.
Above we have compiled and provided you with the necessary information about what the exchange rate is and important information related to the exchange rate. Hopefully, through this article, you have gained useful knowledge to help you come up with the most suitable strategies to bring you profits. Good luck!
Information edited by: lamchutaichinh.vn