What is the price of a coin and what does it depend on?
Coin price. Visitors to the Tradernew.pro website know that currency can not only be a means of payment, it can also be a commodity that can be bought or sold. If all the states of the world used a currency, it would be difficult to talk about its mercantile function. But the world works differently. Most countries issue and use their own national currency. This is what can be bought with the currency of another country.
But in this case, the question arises of the price at which such a trading operation can be carried out. The exchange rate allows you to determine this price. What is it? How is the exchange rate calculated? We will try to answer these questions.
- What is the exchange rate?
- Types of exchange rates.
- Currency convertibility.
- Currency convertibility rates.
- Factors that affect the value of the coin.
What is the exchange rate?
So what exactly is an exchange rate? It is generally accepted that the exchange rate is the price of the currency of one country, expressed in the currency of another.
One of the main criteria to determine the exchange rate is the purchasing power of the currency. In economic theory, there is a law of one price. Based on this law, the base value of the national exchange rate is determined. The calculation is performed in the following sequence:
- The invariability of the value of the goods in any country, wherever it is located, is assumed.
- The goods are valued in national currency (Pd).
- The same item is quoted in foreign currency (Pf).
- The relation of these prices will be the required value of the rate of the national currency to the foreign currency.
S = Pd / Pf
types of exchange rates
It is important not only to understand what the exchange rate is. Their types are also of great importance in understanding the essence of commodity-money relations. The types of exchange rates are as follows:
- Market. The rate formed under the influence of market factors, the main of which are supply and demand, is considered a market rate. Investor interest in the coin is inconsistent. Therefore, the market rate is constantly moving. The growth of the currency is observed at the time of increased demand for it and the lack of supply, and the fall occurs when the supply exceeds the demand.
- Official. The course marked by the decision of the national regulator is the official one. It can be set for a different time period. In the event of a discrepancy between the official rate and the market rate, the regulator must do everything in its power to minimize this discrepancy.
- Exchange. This rate means the price at which the purchase or sale of currency is currently taking place on the stock exchange. For example, when the exchange rate of the euro against the dollar falls, it is profitable to buy euros at the exchange rate, spending the minimum amount of dollars on it.
- Buyer Course. Under market conditions, there is a price that a buyer is willing to pay for a particular currency. It is this price that forms the direction of the buyer. The resident bank is also considered to purchase foreign currency at this exchange rate.
- Seller course. There is a different interpretation of this exchange rate, but the essence boils down to the following: this is the lowest price at which the seller of the coin is ready to make a deal.
- Exchange rate. This rate lets you know how many units of domestic currency you need to have in stock to buy one unit of foreign currency. As a general rule, the exchange rate consists of two prices: the buying price of the currency and the selling price.
The exchange rate and its rates can work in a certain way. There are two of these modes:
- Floating. In this regime, the state does not have a decisive influence on the exchange rate. Its formation is influenced solely by market factors and exchange rate movements occur as a result of changes in supply and demand.
- repaired. The state, through its financial regulators, establishes a fixed value for the exchange rate of the national currency. It can be established for a certain period or operate permanently.
Speaking of the exchange rate, one cannot fail to mention a concept such as convertibility, which determines the ability of a currency to freely exchange one for another. The degree of convertibility of a particular currency depends on the decision of the relevant state body, which has been entrusted with the function of currency regulation.
It is generally accepted that the convertibility of the currency issued by the state is one of the main indicators of the openness of the economy of this state, its ability to compete on equal terms in the world capital and labor market.
Currency Convertibility Rates
In practical application, currency convertibility is divided into types, the main of which are as follows:
- Full convertibility. This type of convertibility implies free access for all residents and non-residents to the unlimited exchange of national currency for foreign currency. Only countries with developed economies can afford this type of conversion. Freely convertible currencies include only the US dollar, the British pound, the Japanese yen, and the euro.
- Partial convertibility. In conditions of partial convertibility, the issuing State imposes restrictions on operations with the national currency, which allows it to be exchanged only for a certain list of foreign currencies.
- internal convertibility. Under the conditions of this type of convertibility, only residents have the right to buy foreign currency to make economic payments abroad.
- External Convertibility. This type of convertibility allows only foreign citizens and companies to bring their capital into the country and exchange it for the national currency.
- closed coin. If there is a prohibition by the issuing state to exchange the national currency for a foreign one, this currency will be considered inconvertible (closed). You can only operate in a limited territory of the state that put this currency into circulation.
Factors that affect the value of the currency
We found out what the price of a coin is and what determines the value of a coin. Under market conditions, it is determined by the market. But along with this, there are a number of factors that can affect the value of a coin:
- State macroeconomic indicators.
- Foreign trade balance of the country. If the export of goods and services exceeds the import, this will have a positive effect on the value of the national currency. With the growth of the country’s gold and foreign exchange reserves, the national currency becomes stronger and its value increases.
- Domestic inflation rate. The exchange rate of the currency directly depends on its purchasing power. A high rate of inflation in the country leads to a decrease in the purchasing power of the national currency, which means that its value is falling.
- Dynamics of the gross domestic product (GDP). GDP growth has a positive effect on the value of the national currency, since with its growth the inflation rate decreases and, as a general rule, the inflow of foreign investment increases.
- The level of the budget deficit. The balance of the state budget, the absence of additional money issuance, not supported by gross domestic product, allows the national currency to strengthen.
- Public debt obligations. With the growth of the public debt with external creditors, the burden on the country’s balance of payments increases. Debt service leads to an outflow of foreign exchange from the country, as a result of which demand increases and the depreciation of the national currency.
- State monetary policy.
- Exchange intervention carried out by the national bank. The bank independently enters the market and buys or sells foreign currency, which in the short term affects the value of the national currency and its stability.
- Interest rate of national banks. The bank’s board can change the level of the discount rate, which affects the value of the currency. The decrease in the interest rate contributes to the reactivation of the national market, the growth of the GDP and the availability of loans for natural and legal persons. As a result, the exchange rate of the national currency is strengthening. But along with this, investors are not interested in low interest rate. They withdraw foreign currency from the country, which in the long term negatively affects the value of the national currency.
- Social and political situation of the country. The currency is very sensitive to any events that take place in the state. Your cost is negatively affected by:
- military conflicts.
- Strikes and civil confrontation.
- Unconstitutional change of government.
- Violation of the territorial integrity of the state.
- Instability of legislation related to foreign exchange regulation.
The price of a coin depends on many factors. Also, this dependency in most cases is ambiguous. The market reacts very slowly to some events and the price practically does not change. Others, at first glance, insignificant events cause a panic in the market, and the price of the currency is rapidly changing in one direction or another.
Answers to popular questions about exchange rates
How is the exchange rate formed? The exchange rate is the expression of the price of a country’s currency in a foreign currency. The calculation of the exchange rate is carried out according to the economic theory of a single price of goods. That is, a conditional product is taken and its value in two different currencies, and then the price is compared in percentage of fortune, and the cash rate is established. For example, if an ounce of gold costs 2 dollars and 150 rubles, then the rate of 1 dollar is 75 rubles. What affects the exchange rate? The exchange rate is a comparison of the value of the monetary units of two states. The rate is influenced by the strength of both currencies in a given pair.Fluctuations in the value of a currency depend on the economic and political situation within the country. Monetary endowments, inflation, commodity productivity indices, and credit ratings are the main components of a currency’s price. Consequently, when the country’s economy falls, its currency depreciates relative to the currencies of other countries. How to calculate the exchange rate? When calculating the exchange rate, the value of each currency unit of the calculated currency pair is taken. To determine the value of a currency, it is necessary to compare the amount of goods purchased by a monetary unit.Today, the cash exchange rate is set by the Central Banks, and the adjustment in the value of the monetary units is produced by the demand for it in the international currency market. How often does the exchange rate change? The currency is conventionally divided by type into a floating rate currency and a fixed rate currency. Developed countries that trade currencies on international exchanges have floating rate currencies. During the work of the exchange, the exchange rate is constantly changing and is fixed only on weekends. With insignificant jumps, banks and exchange offices change the rate 1-2 times a day, and at times of high volatility – 5-7 times a day.When does the exchange rate change in banks? The exchange rate on the stock exchanges changes literally every second, and depending on the volatility, banks determine their own strategy for changing the price of currency units. During periods of high volatility, the exchange rate may change an unlimited number of times, and during periods of low volatility, generally once a day. Each bank decides for itself when it is necessary to change the exchange rate of cash. How to see the exchange rate correctly? An exchange rate is a relative concept of the value of one currency expressed in another currency. The most accurate exchange rate can be found at exchange houses, online.The value of the currency in them can change every second, and does not always correspond to the value of the currency in the spot market. To determine the fall or rise of a currency, you can compare the value indicators in relation to 2-3 foreign currencies. Who regulates the exchange rate? The exchange rate is regulated by international financial exchanges, supply, demand and purchasing power. The national banks of the countries can indirectly influence the value of the currency, increasing or decreasing their own purchases of foreign currency. The government of the country does not directly affect the exchange rate, but can only determine the approximate price required, according to which the Central Bank will stabilize the exchange rate.supply and purchasing power. The national banks of the countries can indirectly influence the value of the currency, increasing or decreasing their own purchases of foreign currency. The government of the country does not directly affect the exchange rate, but can only determine the approximate price required, according to which the Central Bank will stabilize the exchange rate. supply and purchasing power. The national banks of the countries can indirectly influence the value of the currency, increasing or decreasing their own purchases of foreign currency. The government of the country does not directly affect the exchange rate, but can only determine the approximate price required, according to which the Central Bank will stabilize the exchange rate.