Foreign Exchange (FX) is a market that allows trading of currencies internationally. It is decentralized in nature and works as per the rates of the market each day; it is fluctuating in nature. This is considered to be the largest market in the world. Large sized international banks are usually to be found participating in the foreign exchange markets and also play a role in determining the foreign exchange rates.
Difference between Fixed Exchange Rate and Flexible Exchange Rates
A fixed exchange rate prompts that one can exchange his money for the same fixed rate each time he wishes to expose his currency for an exchange; whereas, a flexible exchange rate refers to the currency exchange rates that are subject to fluctuations and are determined by the forces of demand and supply of foreign exchange. Both come with their own merits and demerits. One is well aware of the best foreign exchange rates in Brisbane City.
Merits and Demerits of fixed exchange rate
- The stability in the exchange rates is reliable.
- No such breach in cooperation among the members of the countries regarding currency exchange takes place as the rate has been decided upon earlier.
- Coordination in the macro policies among the countries has a prospect under this system of exchange.
- A scope for devaluation poses a threat for the fixed exchange rates for if the flexible exchange rates are offering a high interest to the currency exchanges, fixed exchange rates would have to suffer a loss.
- Fixed exchange rates are deprived of free market benefits.
- There is no scope of fluctuation in this type of exchange; it does not make much profit annually.
Merits and demerits of flexible exchange rate
- Flexible Exchange Rates does not need a government backup.
- Flaws in the BOP are auto-corrected, and there is no need if a body can attend to the problems.
- Optimum Resource Allocation is possible.
- The fluctuating nature of flexible exchange rates affects foreign trade and capital movement globally.
- It suffers a significant loss when its rate hikes suddenly and is much higher than the fixed exchange rate.
As mentioned earlier, the Foreign Exchange market is the biggest financial market in the world. One must be aware of its functions and the latest moves to stay updated about the rates.