Fixed & Floating echange rate regimes

Merits of Fixed and Floating Exchange Rate Regimes Your Name Subject and Section Professor’s Name October 6, 2024 Exchange rate regimes are critical in most international businesses because they affect export and import price determination, business profitability, and market positioning for global business operations. The exchange rate regime refers to how a particular country organizes its currency based on other currencies. The main categories of the exchange rates regime include fixed and floating regimes. A fixed exchange rate system involves fixing a currency to another or an average of another currency and a composite of other currencies, usually through purchase or selling. On the other hand, the market gives a floating exchange rate when the currency's value is adjusted by the institution in the foreign exchange market by the interaction of demand and supply factors. This paper compares the two systems to argue which is most favorable to international business and relates the critical factors businesses should consider to determine whether one system is preferential. Fixed Exchange Rate Regimes Several factors associated with fixed exchange rate regimes benefit international business in the following ways: First, they foster predictability in the structure of international prices, giving planners and investors certainty. A business whose operations are conducted within an area of a relatively stable exchange rate can fix its price on the commodities produced or services rendered because frequent alterations in the exchange rate will not compromise its profits. In addition, fixed regimes reduce inflation, as most governments are disciplined to sustain the value of their currency through protracted fiscal and economic measures (Eitrheim & Qvigstad, 2024), 2021). This environment can increase investor risk, increasing FDI and economic growth. However, it is essential to know that fixed exchange rates have their benefits, accompanied by severe demerits. The problem is that fixed rates often cause trade and foreign investment imbalances if the fixed rate does not mirror the economic fundamentals. For instance, when a country fixes its exchange rate at an upward bias, exports may decline, thus resulting in trade deficits and possibly damaging native companies (Kalu & Mike, 2020). Further, a fixed exchange rate exposes a country to shedding its foreign exchange reserves, which could transpire during an economic crunch or under attack. There are also likely to be situations whereby governments are compelled to give up on the peg, which leads to a sudden surge in currency devaluation that makes the business environment unpredictable in that market. Floating Exchange Rate Regimes On their part, floating exchange rate regimes provide improved flexibility that suits the needs of many overseas companies well. This decentralization enables currencies to be dynamic, balancing market volatilities and allowing businesses to counter economic spikes, demand shifts, and other alterations in the global market (Cheng et al., 2024). A floating exchange rate can offer a better picture of a countr...