Foreign Exchange: A Complicated View
Have you ever experienced receiving money from a loved one out of the country? Money from each neighboring country in the world has different currencies. With that, the World Bank has made known Foreign exchange to solve the matter as to how much, the value of this money from one country costs in another.
The International banks and funds are a variety of institutions- operating in many parts of the world- that aid member nations in economic development by making loans and by stabilizing exchange rates. International funds provide foreign exchange resources for relatively short periods to member suffering losses in their foreign balance of payments.
Foreign exchange rates, on the other hand, give the price of one currency in terms of another. Some countries have both controlled and free rates. In March 1947, for example, the Uruguayan peso was quoted at 65.83 cents in the controlled market and 56.21 cents in the non-controlled market. The non-controlled market is the relatively free market where exchange rates are likely to be determined according to the free forces of the market. This may not always be entirely true, however. To understand how exchange rates are determined it is necessary to distinguish between the gold standard, free changes and controlled changes of each country.
Foreign exchange rates are the prices, in the domestic currency, of bills of exchange, which are drawn in a foreign currency, and payable in a foreign country. The foreign bill of exchange is a written order drawn by one person, firm, or corporation upon another location in a foreign country, directing the drawee to pay a designated sum of foreign money to a designated party at a specified time and place.
The basic rate of exchange usually is considered to be the price of sight bills drawn against a bank or banker. However, some authorities argue that the price of a cable transfer which is a sight bill drawn against a bank or a banker and transmitted by cable telegraph, is the basic rate. Rates of exchange depend upon the maturities of the bills, and also upon the credit ratings of the parties. The highest rate is charged for a cable transfer drawn against a bank, which provides immediate payment. Similarly, bills drawn against commercial firms sell at lower prices. Prevailing interest rates on short-term funds influence the price relationships of bills of different maturities.
Since foreign exchange rates are prices, they depend fundamentally upon supply and demand forces. The supply of bills offered for sale at any given time depends principally upon the value of current export transactions and reflects the claims of nationals against foreigners on account of the sale of goods, services, or securities as well as claims for any other reason. The demand for bills at any given time depends principally upon the value of current import transactions and reflects the liabilities of nationals to foreigners, because of imports of goods, services or securities or other reasons. Banks act as middlemen between those offering to sell and those desiring to buy bills. They attempt to buy at lower prices than those at which they sell, to fain a return for their services.
If the offerings to sell bills exceed the requirements of those wishing to buy, rates of exchange tend to fall. If the supply of bills offered is relatively small, rates of exchange tend to rise. Since the supply of and demand for bills is fundamentally a reflection of current import and export transactions, exchange rate fluctuations reflect the course of international trade, investment and national debt.
Exchange rates are also influenced by the type of monetary standard, in effect. When countries use gold standards their standard monetary units are defined or expressed in terms of specific amounts of gold. Consequently, the relative gold content of standard monetary units establishes a mint par or gold par rate of exchange. So as long as countries use gold standards their rates of exchange are relatively stable, fluctuating only within the relatively narrow range permitted by the established gold points. Relatively, stability of exchange rates is advantageous because it reduces the risks and uncertainties of exchange and therefore, the risks of foreign trade and investments of transactions. However, it also means that exchange rate variations may be insufficient to correct conditions tending to cause an unbalanced international payment situation. Corrective forces must then operate indirectly and more slowly, through the consequences of gold flows, upon domestic price levels in order to re-establish equilibrium in the balances of payments.
No matter how complicated this system may be, it still exists among us to maintain balance and fairness with regards to money and currencies.