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What is a Fixed Exchange Rate?

Definition: A fixed exchange rate is an exchange rate system in which the rate of a country's currency is established at a particular level in relation to other currencies
Normally, a fixed exchange rate is used to match the value of different currencies in order to make investments, trade and other transactions between two countries easier to complete. With a fixed exchange rate, exporters and importers also have greater certainty for the value of traded goods.

Fixed exchange rates in an accounting context

International companies dealing in different currencies can also establish a fixed exchange rate for their base currency compared to a foreign currency.

By setting a fixed exchange rate for specified periods of time, e.g. one month at a time, companies can avoid having to deal with different exchange rates every day. At the end of the time period, the accounts of the companies can be adjusted for the currency fluctuation within the period.

Companies normally set the fixed exchange rate as the previous month's average exchange rate, as listed on exchange rate websites such as XE.

Example of a fixed exchange rate

As a hypothetical example, a UK company with suppliers in the US could choose to set a fixed exchange rate for a particular month at e.g. .625 GBP:1 USD and subsequently adjust their books to account for currency fluctuations at the end of the month.

Fixed exchange rates in the e-conomic system

In the e-conomic software, all exchange rates are updated every night using data from XE. The system also retains the exchange rates historically.

e-conomic also allows you to set a fixed exchange rate which you can apply to a set of currencies for a period of time chosen by you.

The e-conomic system supports all the exchange rates in the 'Fixed exchange rates' menu on the 'Settings' tab (except for the exchange rates for the currencies CFA and RSD).

Read more about exchange rates in e-conomic in our e-copedia.

 

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