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Types Of Exchange Rates And Their Benefits
With increase in the financial transactions, business and tourism industry; banks have also enhanced their services to match the pace. The timings of the banks have improvised, along with the assistance of English speaking staff to help international clients in foreign transactions, even in some of the remote locations of the world. While certain countries levy transaction fees on the international banks for the money transfer and one should always check the rate before transacting large amounts. However there are banks with negotiable rates and fixed rate facilities too..
If anyone wishes to purchase any property in any international location, one must do a through research before that. Initially to begin with the property laws of the country followed by investigating and finding specialist currency broker and also using spot contract facility for fixing exchange rate well in advance with the transacting bank.
There are various ways in which exchange rates can be expressed:
1. Spot Exchange rates – This exchange rate is driven by FOXEX market on the basis of demand and supply of the currency. This exchange rate is derived with actual exchange rate based on the current market value of the currency.
2. Effective Exchange Rate Index (EER) – This is a weighted index based on sterling's value where many international currencies are weighted in proportion based on trade between the UK and each country and then the rate is decided.
3. Forward Exchange Rate – Forward rate is based on forecasting models determining the value of any currency at a futuristic value. This exchange rate is used by the companies and banks for buying foreign currency with reduced risk of future market fluctuations.
4. Bi-lateral Exchange Rate - This is simple method where the value of one currency is determined by its trading value against another currency.
5. Real Exchange Rate – Real exchange rate is domestic price index ratio between two countries. Any rise in the real exchange indicates aggravation of international competitiveness for a country.
There is a difference between the exchange rates in banks and counter, when one wants to travelers cheques to cash. Cash counters gives less money while inter- bank transfers gives better rates.
Benefits of exchange rates lie both for the country’s economy and the trader. While traders can earn good money, countries use it to create more favorable economic environment by manipulating large reserves of foreign currency.
This helps then to manipulate exchange rates and stabilize the foreign exchange rates. More the country's foreign reserves, the better the country can defend itself from tentative attacks on the domestic currency.
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