Fundamentals of Financial Management, Third Edition

POINTS TO REMEMBER

1. Distinguish between pegged exchange rate and floating exchange rate regimes.
   • In a pegged exchange rate regime, the value of a currency is fixed in terms of other currency or basket of currencies.
   • In a floating exchange rate regime, the exchange rate is determined by market forces. So it is not fixed.
   • In a floating exchange rate system, there appears no gap between nominal and real exchange rate. Additionally, it has insulation properties. But wide fluctuations in exchange rate are found in many cases.
2. Distinguish between independent and managed floating.
   • Independent floating, as opposed to managed floating, does not have market intervention by monetary authorities, normally central bank of the country. Even if there is ...