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FINANCIAL INSTRUMENTS

Money Exchange Rate

Why do you need the money exchange rate?

01/09/2021

What is foreign exchange rate?

Currency exchange is the exchange of one currency against another against a price known as the exchange rate. To facilitate currency pricing and to avoid confusion, each currency pair, by agreement, is always quoted equally (eg USD / LEK, EUR / USD, GBP / CHF), with the first currency being the Base currency and the other currency, is the Secondary currency. The exchange rate is always given in reference to the Base Currency, both in buying and selling (eg, 1 EUR = 123.00 LEK in buying, and 1 EUR = 123.40 LEK in selling).


Why is foreign exchange rate needed and where is it used?

Currency exchange is needed mostly from companies that have cash flows in two currencies, namely income in one currency and expenses in the other currency. This can include import-export trading companies, as well as international companies operating in Albania. Foreign exchange can also be used by both companies and individuals to diversify their liquidity or savings portfolio. There is, meanwhile, a global discussion that the exchange rate should be included in the mandates of central banks, in addition to inflation or employment, as its role has grown and has become an important factor in the development of the economy.

What are the Effects and Risks of foreign exchange?

- At the Macroeconomic Level:
The exchange rate has an effect on the balance of payments or on the public debt (ie on the debt of the Albanian state which is taken in foreign currency).
- At Business Level:
It can affect the prices of various import or even export products. Foreign exchange can also have a hedging effect on exchange rate fluctuations if companies decide to use the exchange to hedge against exchange rate fluctuations for a time-bound freight contract.


Foreign exchange rate risks

Long-term movement of the exchange rate in one direction, ie the devaluation or appreciation of the base currency of the currency pair. This may result in a net loss of savings or liquidity value if the entity has retained the currency that has been impaired. This fact also applies to customers who want to take advantage of foreign exchange, moving funds from one currency to another. In this case, the high exchange rate volatility can penalize these clients.

* Therefore, central banks keep foreign exchange reserves in the form of baskets, without focusing only on one currency.

 

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