Concept What is the exchange rate? has been mentioned a lot in recent years because in the current period of integration and globalization, the need for currency exchange between countries is very necessary. Understanding information as well as methods and formulas for calculating exchange rates will help people make transactions between countries more quickly and efficiently. All information will be answered in detail by Makemoney in the article below. Follow along!
Table of Contents
What is the exchange rate?
An exchange rate is also known as an exchange rate or foreign currency exchange rate. This is the exchange rate between 2 currencies of 2 different countries. Simply put, it is the conversion of the price of one country’s currency to another. More specifically, the amount of currency needed to buy 1 unit of another country’s currency.
The Vietnamese exchange rate is the value of Vietnamese dong to the value of foreign currency. For example, the exchange rate USD/VND = 22,760 means that 1 USD = 22,760 VND or 22,760 VND will buy 1 USD.
Exchange rate classification
Currently on the market there are many ways to classify different exchange rates. In each way is based on each unique characteristic. Here, Makemoney will introduce a few specific classifications of exchange rates as follows:
Based on the object to determine the rate
According to this classification, the exchange rate will have 2 specific types as follows:
- Official exchange rate: Determined and announced directly by the State Bank of Vietnam. Based on this exchange rate, commercial banks or credit units will calculate the selling, buying and swapping prices of a certain currency pair.
- Market price: Formed on the basis of supply and demand relationship
Based on exchange rate
- Nominal exchange rate: The current rate of a currency, regardless of inflation.
- Real exchange rate: The current rate of 1 currency, but taking into account inflation.
Based on the foreign exchange transfer method
- Exchange rate: This is the exchange rate for the exchange of foreign currency by electricity. This rate is often listed at banks and is also the basis for determining other exchange rates.
- Mail exchange rate: The exchange rate by mail, usually lower than the exchange rate.
Based on forex trading time
- Buying rate: The rate the bank accepts to buy foreign exchange
- Selling rate: The rate the bank agrees to sell foreign exchange
Usually, to ensure a profit for the bank, the selling rate will always be higher than the buying rate.
Based on payment term
- Spot rate: Is the exchange rate listed by a credit institution at the time of spot delivery or agreed upon by the two parties. The payment needs to be made within 2 days from the date of commitment.
- Forward rate: Is the rate calculated by credit institutions or by agreement between two parties. However, this exchange rate needs to be within the range specified by the State Bank on the forward rate.
Types of exchange rate regimes
The exchange rate regime is understood as the way a country manages its currency. In different countries, this exchange rate regime is also different. However, there will usually be 3 exchange rate regimes including floating exchange rate, floating exchange rate with term, and fixed exchange rate. Specifically:
Floating exchange rate
- A floating exchange rate is a type of exchange rate that is determined based on the supply-demand relationship in the foreign exchange market. This rate will depend on market demand without any intervention from the State.
- The use of this exchange rate regime helps to balance and distribute resources efficiently. The floating exchange rate regime aims to support a stable world economy, a balanced balance of payments, and limit risks and other disadvantages to the economy.
- However, the reality of the world today will not be any country applying this exchange rate regime, but most governments will intervene to limit strong fluctuations affecting the domestic economy.
Fixed exchange rate
- The fixed exchange rate will be established and maintained by the State Bank. The use of a fixed exchange rate helps to stabilize the foreign investment environment, reduce inflation and at the same time minimize fluctuations from the market.
- However, the exchange rate regime is not used in many countries around the world. Therefore, maintaining this exchange rate regime for a long time can easily lead to an imbalance in the balance of payments.
Regulated exchange rate
- A regulated floating exchange rate is one that lies in between the fixed and floating exchange rate regimes. It fluctuates based on the supply and demand relationship in the market but sometimes there is still intervention from the central bank. This will be the regime being applied by many countries around the world.
- The regulated floating exchange rate regime is considered to be relatively stable, so it will contribute to stabilizing the economy, promoting the development of economic relations and ensuring the independence of monetary policy. …
In case of large fluctuations in foreign exchange, affecting the general safety of the economy, the central bank will immediately take the necessary measures to stabilize the market.
The formula for determining the exchange rate
There are many formulas for determining and calculating different exchange rates. Depending on the specific case, the user will apply the most appropriate formula.
- Exchange rate between 2 quote currencies
To calculate the price between two quote currencies, people will use the following formula:
Quote/Price = (quote/USD) / (quotation/USD)
- Exchange rate between 2 base currencies
The formula to calculate the exchange rate between 2 base currencies is calculated according to the following formula:
Quote/quote = (USD/quote) / (USD/quote)
- Exchange rate between 2 base and quote currencies
The formula for calculating the exchange rate between the 2 base currencies and the valuation is calculated according to the following formula:
Quote/Valuation = (quote/USD) / (USD/quotation)
Factors affecting the exchange rate
The exchange rate in the forex market will depend on a lot of different factors. Here we will summarize for you a few basic factors that influence the most, which are:
- Inflation rate: Changes in the inflation rate are the direct causes that affect the exchange rate. If this ratio is higher in the country than abroad, the exchange rate increases, the value of the domestic currency decreases and vice versa.
- Interest rates: When domestic interest rates are lower than in foreign countries, it is easy to lead to an increase in the exchange rate, a decrease in the domestic currency and vice versa.
- Public debt: In addition to the inflation rate and interest rate, public debt will also be one of the factors affecting the exchange rate because the increase in public debt causes the inflation rate to increase and this will cause indirect effects. for exchange rate.
- Trade exchange: Includes two factors: trade balance and economic growth. In case the growth rate of export product prices is higher than that of imported products, the exchange rate will increase, the exchange rate will decrease, the domestic currency will increase and vice versa. If the balance of payments is high, the domestic currency will decrease, the foreign currency will increase, the exchange rate will increase and vice versa.
Above we have summarized all information related to what the exchange rate is, the calculation formula and influencing factors. Hopefully through this article, you have gained a useful amount of knowledge to help you come up with the most appropriate strategy to bring high profits. If you have any questions or need a free consultation, please contact us immediately Makemoney via hotline number 0944.31.9963 Please