Fixed vs Floating Interest Rates in Money Market: A Comparison - Essay Sample

Introduction

In the finance market, interest rates are charged either on the fixed or floating interest rates as the repayment terms. Fixed interest rate is offered to lenders on static instalment not affected by money market fluctuations and other economic eventualities. On the other hand, floating or fluctuating interest rate depend on the money market situations (Morosan & Zubas, 2015). The two categories of interest rates applied in the money market show some differences based on how their regulations are applied. Consequently, fixed and floating interests rates defer in the sense that a fixed interest rate has static instalment that is not affected by fluctuation in the financial market. Floating interest rate is volatile that varies with the trends in the money market. However, the two kinds of interest rates have different preferences from buyers and sellers in the market as well as distinct differences. The differences include; high-interest rate on the fixed interest rate but the low-interest rate on the floating or fluctuating interest rate. Fixed interest rate is not affected by the financial market eventualities; thus, possible budget planning and a sense of security (Morosan & Zubas, 2015). Alternatively, floating or fluctuating interest rate are easily affected by the changes in the financial market, making it highly risky because it generates savings; thus, it is difficult to budget as well as manage finances.

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Foreign Exchange Rate Determination in Business Implication

In the currency exchange market monies traded are determined on the foreign exchange rate that one currency can be exchanged with another currency. The buying and selling rate of local money in exchange for foreign currency rely on fixed and floating exchange rates. The fixed exchange rate entails of the static exchange rate of one country's currency against another country's currency with minute fluctuation (Nicita, 2013). On the other hand, the floating exchange rate is the unregulated currency exchange rate, where the monetary authorities' stipulation depends on the market supply and demand relationship. This type of currency exchange has unlimited fluctuation.

Foreign exchange has potential role incorporates the determination of business implications which include the mechanisms of exchange in the international character of trade. When making business purchases in the international market the transactional cost, it is important to consider the de-mystification of the international market value. The dynamic economy on the currency value fluctuates on the demand and supply patterns guiding the income impacts international business gain from transacting on the international market (Engel & Zhu, 2019).

Buying and selling products internationally foreign exchange rates between the inter-nations determine the economic health in the inflation of interest rate ranking. The currency value factors have a high dependency on the economic intervention attributed to other external actors like inflation, comparative interest rates as well as the domestic demand and supply in the money market determined on the global focal point (Nicita, 2013). The effects of the foreign exchange rate translate to the unite cost and prices because of the financial profit margin cut in the transactions. The fixed and or floating exchange rates have various determinations to ensure that international corporations are maintaining profitability as well as meeting the domestic market's demand.

Computation of the Exchange Rate Between the USA Dollar (Fixed) And Japanese Yen (Floating)

Calculating the foreign exchange rate between two currencies need consideration of the real and nominal exchange rates of the number of times fixed currency and floating currency are worth. For instance, the exchange rate between the U.S. dollar and the yen on the 22nd September 2019 where the exchange rate records read 1 USD = 107.557 Jpy while 1 Jpy = 0.00929737 USD, therefore, 1/107.557 = 0.0093.

References

Engel, C. & Zhu, F. (2019). "Exchange rate puzzles: evidence from rigidly fixed nominal exchange rate systems", BIS Working Papers, 805. Retrieved from https://www.bis.org/publ/work805.pdf

Morosan, G. & Zubas, I.M. (2015). Interest rate, exchange rate, and inflation in Romania. Correlates and interconnection. Journal of Public Administration, Finance and Law, 8, 146 - 160. Retrieved from http://www.jopafl.com/uploads/issue8/INTEREST_RATE_EXCHANGE_RATE_AND_INFLATION_IN_ROMANIA.pdf

Nicita, A. (2013). Exchange Rates, International Trade and Trade Policies: Policy Issues in International Trade and Commodities Study Series No. 56. Geneva: United Nations Conference on Trade and Development, UNCTAD. Retrieved from https://unctad.org/en/PublicationsLibrary/itcdtab57_en.pdf