Exchange rate – Definition, Conversion, Best Regimes, and Uses

Table of Contents

What is an Exchange rate?

The Exchange rate is a reference used in the exchange market to know the number of units of national currency.
It must pay to obtain a foreign currency, or similarly, the number of national currency units that are obtained when selling a unit of foreign currency.
For example, if to obtain a United States dollar (dollar), must deliver 18 Mexican pesos (pesos).
The nominal exchange rate between a state of Mexico and the United States will be 18 pesos per dollar.

The dollars are multiplied by the exchange rate to know many pesos a certain dollar amount represents.
Continuing with the previous example, 100 dollars represents 100 * 18 = 1,800 pesos.
It is divided by the exchange rate to determine how many dollars a certain amount of pesos represents.
That is, 1,800 pesos are equivalent to 1,800 / 18 = 100 dollars.
The exchange regime determines each country’s exchange rate.
That is, how you decide to manage the value of your currency compared to others.

The best-known regimes are the fixed, flexible exchange rate and exchange bands.
Fixed
In this system, the monetary authority establishes a level of the exchange rate and commits itself.
Intervening in the market by buying or selling foreign currency to guarantee that remains at that level.

Flexible or floating

The currency’s price is determined by the supply and demand of the market without the intervention of the monetary authority.

Exchange bands

Firstly, it is an intermediate scheme between a fixed and a flexible regime.
Secondly, the monetary authority sets a round in which it lets to move freely.
When the exchange rate reaches the ceiling or the band floor, the power intervenes by selling or buying currencies to keep it in the band.

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In the context of rising, some benefit, such as exporters and those who have savings or investments in foreign currency.
However, it is always advisable to take some precautions to avoid being affect by volatility.
Save in the currency that the salary we receive.
The dollar has an unpredictable cost and behavior in the Peruvian market.
It is advisable to spend and save in the currency in which the income we receive.

It is healthy to diversify savings and investments in currencies so that time deposits are in both soles and dollars and avoid exchange rate risk.

If you have a high sum of dollars or soles and want to change, the idea is to do it in small parts to minimize volatility risks.

Carrying amounts of cash can be risky. BBVA offers T-Cambio, a digital module for buying and selling dollars.
And also, it is for individuals and companies for greater security and convenience.
Through this functionality, the client can quote and exchange dollars from their cell phone or computer 24 hours a day.
Also, it offers a preferential quote, better than the one at the window.

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