Fixed Exchange Rate
- The fixed exchange rate is officially fixed by the government or a competent authority, not by the market forces.
- In fixed exchange rate wherein the government and central bank attempts to keep the value of the currency is fixed against the value of other currencies.
- The value of each currency was set in terms of gold and exchange rate was fixed according to the gold value of currencies that have to be exchanged.
- For example in India, a currency price is fixed an official price of its currency in reserve is issued by the central bank.
- Once the rate determined, the central bank undertakes to buy and sell foreign exchange and the private purchase and sales are postponed.
- An apex bank changes the exchange rate if needed.
Flexible Exchange Rate
- A flexible exchange rate is also known as a floating exchange rate.
- In a flexible exchange rate, a rate is set according to the demand and supply of market forces.
- A country's economic situation will determine the market demand and supply of its currency.
- It is particularly determined concerning other currency it means higher the demand of particular currency, the higher it's exchange rate.
- If an economy is strong the flexible exchange rate is higher and vice a versa. So the government has no control over the flexible exchange rate.
- A value of the currency is fluctuated or shift freely according to the demand and supply of international exchange.
Difference Between Flexible Exchange Rate and Fixed Exchange Rate
Basis
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Fixed exchange rate
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Flexible exchange rate
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meaning
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A fixed exchange rate is a rate which is maintained and controlled by the central government.
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A Flexible exchange rate is a rate which is determined by the market force.
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Controlled by
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A fixed exchange rate is controlled by an apex bank or a monetary authority.
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A flexible exchange rate is controlled by the demand and supply forces.
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How it affects currency
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A fixed exchange rate has a devaluation and evaluation in a currency.
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A flexible exchange rate can depreciate and appreciate the value of a currency.
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Hedging
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There is no hedging risk if the country is using fixed exchange rate.
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Hedging is used to reduce the currency risks in the flexible exchange rate.
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