Exchange Rate Definition

A rate is a coefficient that expresses the link between two magnitudes. Change , meanwhile, is to substitute one thing for another.

The notion of exchange rate , which can also be mentioned as exchange rate , refers to how much of an X currency can be acquired with a Y currency .That is, how many Argentine pesos I need to buy a dollar, or how many bolivares I will have to deliver to receive a euro, for example.

It is, therefore, the exchange ratio that exists between the currencies of two countries .The exchange rate can be real or nominal.> 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.

Examples of nominal change

The nominal change is expressed in terms of the national currency and to simplify the concept we could say that it is the amount of units of this that need to be delivered to get a unit of a particular foreign currency or how many units of the National currency is obtained by delivering an amount from abroad.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 a euro it is necessary to deliver 5 Argentine pesos, the nominal exchange rate between countries or regions, in this case Argentina ($) and the European Union (€), is 5 $/€.To know how much will be obtained from a certain amount of pesos, it must be multiplied by the exchange rate.If we had for example € 100 and sold them for the change of $ 5/€, we should perform the following operation € 100 * 5 $/€ and we would get $ 500.Otherwise, the amount of pesos would be divided by the exchange rate: $ 1000/$ 5/€=$ 1000 * € 1/$ 5, which would return us € 200.

We must also talk about two important concepts:

* Real appreciation: refers to the variation of the assets of a country with respect to foreigners, becoming more expensive, whose consequence is the fall in the real exchange rate;

* Real depreciation: occurs when the opposite occurs, the assets of one country become cheaper compared to those of another, the price of the assets of that other country rises and its consequence is the rise in the exchange rate real.

Another term related to this concept is the exchange rate representative of the market that is usually presented with the acronym TRM and is the official indicator of comparisons between regional and foreign currencies; This value is calculated taking into account the sale and purchase operations carried out in the international financial sector and that must be respected within the territorial borders.

Institutions that regulate the exchange rate

The Central Bank of each country is the institution that regulates the exchange rate system, so there can be a fixed exchange rate , where the Central Bank decides the price of the currency and this could not vary (that was the case of Argentina during the time of convertibility, in which a peso is worth a 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 for the Central Bank to choose a floating exchange rate but to develop interventions to maintain the value of the currency within certain parameters.If the price of the foreign currency in question descends too much, the Central Bank starts selling to increase the supply; in the opposite case, the Central Bank is engaged in acquiring to avoid large increases.

Finally we can talk about the Forex Market, which is the name that receives the international institution where currency exchange operations are carried out; It involves private and institutional investors, central banks around the world, and other entities related to the movement of money in the world.