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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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25.1 EXCHANGE RATE REGIME

It is the International Monetary Fund (IMF) that determines the shape of the exchange rate regime. It has given its member countries two options as to the type of exchange rate regime they are to follow. These options can broadly be grouped as:

  1. Pegged exchange rate regime; and
  2. Floating rate regime.

A currency is pegged either to a single currency or to a basket of currencies. This means that the value of a particular currency is fixed in terms of the value of the other currency or the weighted average value of the currencies in the basket, of course, within a given fluctuation band.

The distinctive features of these two options need some explanation.

25.1.1 Pegged versus Floating Exchange Rate Regime

In the system ...

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