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Exchange Rates

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The modern world is full of different notions that are considered to be very important for the market and its participants. Undoubtedly, exchange rate is one of such notions. The drastic changes in computerized systems of management have led to the development of a new way of dealing with shares and investments such as high frequency trading (HFT). This new trend is developing at a high speed and becoming more and more popular around the world. Yet, there are many reservations related to the reasons and consequences of HFT.

Therefore, this question should be studied more deeply in order to reveal its effects on institutional investors and the global trading market in general. It is obvious that the main distinctive feature of any kind of trading is money. The item of currency is highlighted in many scientific journals and other sources of information. It is quite important to provide an overview of the existing literature on the topic in order to form a personal opinion of the modern tendencies in the financial market. Nevertheless, concerning this paper, it is necessary to mention that it will be focused mainly on such an issue as exchange rates. Another objective of this paper is to figure out all the principle of this notion in detail.

In modern business world and extremely active international relationships between the countries all over the planet, people cannot do without exchange rates. The fact that it corresponds to reality is beyond any possible doubts.

Currency is as important in everyday life as toothpaste and a toothbrush. This truth does not require some additional evidence. It is quite obvious, and people claim it to have reasonable ground.

How actually exchange rates can be explained? In simple terms, exchange rate or “foreign-exchange rate, forex rate or FX rate is the rate at which one currency can be exchanged for another” (Exchange rate 2013). Longman Dictionary provides the general explanation of exchange rate. According to it, exchange rate is the value of money of one country compared to the money of another country. In comparison to relatively simple definition mentioned above, there is one more, rather economic and formal. It states that "an exchange rate is the current market price for which one currency can be exchanged for another" (Exchange rate mechanism 2013). It means that foreign exchange rates are current and they are determined by foreign exchange market. Thus, exchange rates are tightly connected with trade, which is the main reason why people convert one currency to another.

Exchange rates are supposed to be essential determinants of international trade. As a related value of two currencies, FX rate can be efficiently explained in this way. Imagine that you are a world traveler and you are about to go to Hungary. The point is that Hungarian currency is called forint. For instance, you need to exchange American dollars into that international currency. Therefore, one US dollar is 236.556 Hungarian forints. One would undeniably feel confident with this currency in the pocket, since everyone knows that money is power. Moreover, currency that is suitable for a particular reason in a particular place is the most valuable. Comprising a great value, currency influences the country in loads of ways. Indeed, it runs the trade and makes businesses work. Money of a particular currency is distributed among the entire nation. Consequently, even incremental changes in national currency can influence numerous economic spheres and financial processes. Obviously, they influence the price of an apple, which one is going to buy tomorrow. To illustrate the importance of currency value, imagine that your country has a strong currency. It is known that if currency of a particular country is strong, it is possible to buy foreign goods at the cheaper price. Thus, it will be beneficial to purchase an apple from another country paying less and, correspondingly, your country will be better-off. Therefore, this is the power of currency.

One should remember that exchange rates can be very different. The main division distinguishes two main types of exchange rate, which are fixed exchange rate and floating exchange rate. The difference is that fixed exchange rate, also called "a pegged exchange rate", is not likely to change. The rate is strictly controlled by central bank intervention and is considered to be an official one.

On the contrary, floating exchange rate varies according to supply and demand of currency. The invaluable thing, however, is that floating exchange rate is more efficient economically and is generally more flexible.

Naturally, productivity of exchange rates is regulated by certain mechanism. It is obvious that exchange rates are influenced by many factors that are a part of one system. They are interest rates, property speculation, investment, capital flows, supply and demand, as an essential part of any trade, and competitiveness.

Inflation is probably one of the strongest indicators of influence on interest rate. It occurs when the government prints too much money that simply loses its value. Moreover, inflation motivates people to exchange their currency for a more stable one. Interest rates are also a powerful cause for exchange rate, as both are tightly bound. For example, higher interest rates attract foreign capital and cause the rise of exchange rate. Therefore, every country cares a lot about such economic processes as budget deficits, negative interest rates, and economy overheating since all the fiscal processes will sooner influence the state of currency. 

According to many market specialists, exchange rates make contribution into the market liquidity, price discovery and market efficiency.

Undoubtedly, inadequate regulations in the sphere of sophisticated IT technology may prevent the entire market from further normal development and threat its integrity. Thus, the control of exchange rates should be performed in a careful way in order to take advantage from it.

The analysis of academic literature on the topic of exchange rates suggests that its influence on the market quality is rather positive. It is interesting that six out of eight recently published scientific papers demonstrate only beneficial effects of the discussion item on the market.

It is obvious that the assessment of exchange rates should be analyzed using functional but not institutional approach. Nowadays, this phenomenon is very typical.

It is quite important to remember the significant function of exchange rates. They determine economic health of the country, its image on the international level, its authority and power, gained with the help of national currency. As a part of the world economy, exchange rates make a huge impact on trade. Furthermore, they are meticulously controlled and fixed by the daily newspapers as well as different sites. In such a way, the whole world is informed about the effective use of currency.

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