Advantages And Disadvantages Of Currency Exchange

INTRODUCTION

In recent years forecasting of financial data such as interest rate, exchange rate, stock market and bankruptcy has been observed to be a potential field of research due to its importance in financial and managerial decision making. Currency Exchange give a rate of currencies in pair of currency of two countries e.g. USDPKR for U.S. Dollar and Pakistani Rupee. This rate can be used to buy or sell from Currency Exchange. Nowadays the trading of currency is increased and people invest their money in specific currency as per the future scope of profitability. Currency Exchanges monitor events all round the world and the currency rates are managed globally based on the economical valuation of any country’s currency.

Main focus of this assignment is to identify

 It allows more powers to central bank so that it can exert considerable influence on BOP or other macro-economic variables.

 It provides the hedge against unnecessary depreciation of currency.

 It eradicates the speculative business to a great extent.

Disadvantages of Fixed Exchange Rate:

Following are the disadvantages.

1. First of all it reduces the central bank liquidity. This is because central bank always has to hold huge gold and exchange reserves just for the buying and selling of home currency in home market. Due to this fact such reserves can’t be used elsewhere. If majority of the countries are working on fixed exchange rate then not only the liquidity of central bank of all such countries are reduced but the international trade liquidity is also reduced.

2. The system does not give any method of changing the rate once fixed initially. The need to change the rate arises in response to fundamental disequilibrium in country’s balance of payments. But no easy method of changing the basic rate is provided by this system. The only way out available is that of devaluation but that in itself could prove drastic in certain