Ifm Notes

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CHAPTER 6

Fixed Exchange Rate System
In a fixed exchange rate system, exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries. A fixed exchange rate would be beneficial to a country for the following reasons. First, exporters and importers could engage in international trade without concern about exchange rate movements of the currency to which their local currency is linked. Any firms that accept the foreign currency as payment would be insulated from the risk that the currency could depreciate over time

Advantages of Fixed Exchange Rates to MNCs.
In a fixed exchange rate environment, MNCs may be able to engage in international trade, direct foreign investment, and international finance without worrying about the future exchange rate. Consequently, the managerial duties of an MNC are less difficult. Disadvantages of Fixed Exchange Rates to MNCs.

One disadvantage of a fixed exchange rate system is that there is still risk that the government will alter the value of a specific currency. Although an MNC is not exposed to continual movements in an exchange rate, it does face the possibility that its government will devalue or revalue its currency Freely Floating Exchange Rate System

In a freely floating exchange rate system, exchange rate values are determined by market forces without intervention by governments. Whereas a fixed exchange rate system allows no flexibility for exchange rate movements, a freely floating exchange rate system allows complete flexibility. A freely floating exchange rate adjusts on a continual basis in response to demand and supply conditions for that currency. Advantages of a Freely Floating Exchange Rate System.

One advantage of a freely floating exchange rate system is that a country is more insulated from the inflation and unemployment of other countries. An additional advantage of a freely floating exchange rate system is that a central bank is not required to constantly maintain...
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