The exchange rate is the coefficient that reflects the link between two currencies.
A rate is a coefficient that expresses the link between two quantities. Change , on the other hand, is replacing one thing with another.
The notion of exchange rate , which can also be mentioned as exchange rate , refers to how much of a currency X can be acquired with a currency Y. That is, how many Argentine pesos do I need to buy a dollar , or how many bolivars will I have to deliver to receive a euro, for example.
It is, therefore, the exchange rate relationship that exists between the currencies of two countries . The exchange rate can be real or nominal. The real exchange rate indicates the relationship that exists when an individual wants to exchange products or services between two nations , while the nominal exchange rate is the direct link between one currency and another foreign currency.
Examples of nominal exchange rate
The nominal exchange is expressed in terms of the national currency and to simplify the concept we could say that it is the number of units of it that need to be delivered to obtain a unit of a particular foreign currency or how many units of the national currency are they obtain by delivering an amount from the foreigner. This value changes over time; The worse the economic situation of a country, the higher this change will be.
Expressed in values, if for example to obtain one euro it is necessary to deliver 5 Argentine pesos, the nominal exchange rate between the countries or regions, in this case Argentina ($) and the European Union (€), is 5 $/€ . To know how much you will get from a certain amount of pesos, you must multiply it by the exchange rate. If we had, for example, €100 and we sold it for the exchange rate of $5/€, we would have to carry out the following operation €100 * $5/€ and we would obtain $500. In the opposite case, the amount of pesos would be divided by the exchange rate: $1000 / $5/€ = $1000 * €1 / $5, which would return €200.
The exchange rate is regulated by the Central Bank of each country.
Appreciation and depreciation
We must also talk about two important concepts:
* Real appreciation : refers to the variation of a country's goods with respect to foreign ones, becoming more expensive, the consequence of which is the fall of the real exchange rate;
* Real depreciation : occurs when the opposite occurs, the goods of one country become cheaper compared to those of another, the price of the goods of that other country rises and its consequence is the rise of the real exchange rate.
Another term related to this concept is the representative exchange rate of the market, which is usually presented with the acronym TRM and is the official indicator of comparisons between the regional currency and foreign currencies; This value is calculated taking into account the sales and purchase operations carried out in the international financial sector and must be respected within territorial borders.
Institutions that regulate the exchange rate
The Central Bank of each country is the institution that is dedicated to regulating the exchange rate system. In this way, there can be a fixed exchange rate , where the Central Bank decides the price of the currency and it cannot vary (that was the case of Argentina during the convertibility era, in which one peso was worth one dollar) . Another possibility is the floating or flexible exchange rate , where the price of the currency is released to the game of supply and demand.
It is even possible that the Central Bank chooses a floating exchange rate but develops interventions to maintain the value of the currency within certain parameters . If the price of the foreign currency in question drops too much, the Central Bank begins to sell to increase the supply; Otherwise, the Central Bank dedicates itself to acquisitions to avoid large increases.
Finally we can talk about the Forex Market , which is the name given to the international institution where currency exchange operations are carried out; Individual and institutional investors, central banks from around the world, and other types of entities related to the movement of money in the world participate in it.