The modern world economy is characterized by frequent changes in exchange rates. Daily news from trading platforms has long been an integral part of life. However, determining the national currency rate closest to reality is not always an easy task. Figures from different sources sometimes do not coincide with each other.
Exchange rate
The currency value of a state can be expressed in grams of precious metals or foreign currency. The second way to compare purchasing power is called the exchange rate. It is determined in the process of free public bidding or is established artificially.
The way the exchange rate is formed depends on factors such as the state’s foreign exchange policy, as well as the convertibility and liquidity of a particular currency. Purchase and sale operations take place in various forms on a large number of trading floors. There are cash, interbank and futures currency markets. However, in some cases, due to the lack of public auctions or potential sellers and buyers, theoretical prices are set.
Types of currency regimes
The governments of several states prefer to artificially fix the rates of their national currency units and not allow open bidding. Typically, such decisions are dictated by the need to protect economic interests. Sometimes restrictions are imposed only on certain types of currency transactions. In such cases, we are talking about partial convertibility of monetary units. Some states almost completely transfer to the free market the task of forming the national currency exchange rate. The participation of financial authorities is reduced to periodic interventions on trading floors in order to prevent inadequate weakening or strengthening of the monetary unit.
Theoretical price
The indicative course is a pretty loose concept. This expression means a figure that serves as a guideline for value, but does not guarantee the possibility of concluding a real transaction at a specified price. The cause of this phenomenon may be extremely low liquidity or a complete lack of market. However, in some cases, the indicative rate is the weighted average price calculated on the basis of the results of free and active trading. This quotation is approximate, but in general it reliably reflects the situation on the market.
If we are talking about an absolutely illiquid or non-convertible for legal reasons currency, the indicative rate is a purely theoretical price based on any opinions or sources of information. According to the general belief, the only reliable confirmation of any quote is a significant number of transactions concluded with it with a large total trade turnover. This is not to say that the indicative course is a means of manipulation. However, it is merely background information, sometimes vaguely related to the real situation.
Examples
Indicative exchange rates are set by the state or by financial institutions such as banks and exchanges. An example is China's policy on the convertibility of the renminbi. In the mainland, a limited amount of exchange operations is allowed at the rate recommended by the government. But in Hong Kong, a special economic zone, there are free trades in Chinese currency.
The indicative dollar / ruble rate is calculated by the Moscow Exchange. This is done for technical purposes, to determine the value of shares of Russian companies, expressed in US currency.