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Assume that there is a fixed exchange rate is overvalued, what can the central bank due...

Assume that there is a fixed exchange rate is overvalued, what can the central bank due to defend the currency?

What is the difference between a spot and forward exchange rate?

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Answer #1

Assume that there is a fixed exchange rate is overvalued, what can the central bank do to defend the currency?

Overvalued fixed exchange rate means the value of domestic currency is higher than the foreign currency. This hurts the exports of the company because the exporters get paid in foreign currency, which is weaker against the domestic currency.

The central bank can sell its own currency to bring down the value of its currency. This leads to an increase in the foreign reserve and more of domestic currency in the economy.

What is the difference between a spot and forward exchange rate?

The spot exchange rate is the rate applicable for immediate exchange of currencies.

The forward exchange rate is the rate agreed today between two parties to exchange foreign currency on a future date.

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