Types of exchange rates by exchange rate system

· Free floating: value of the currency is determined solely by market demand for and supply of the currency in the foreign exchange market.

· Managed floating exchange rates: value of the currency determined by market demand for and supply of the currency with no pre-determined target for the exchange rate is set by the Government

· Semi-fixed exchange rates:Exchange rate is given a specific target

· Fully-fixed exchange rates: Commitment to a single fixed exchange rate

The Forecast of Exchange Rates, Currency Parity:We want to start our forecast of exchange rates by assuming that a perfect capital market (PCM) exists, because it makes it easier to predict exchange rates. PCM assumptions: no transaction costs, no taxes, and complete certainty.

· Purchasing power parity (PPP) theory holds that the exchange rate between two currencies will be determined by the relative purchasing power of these currencies. This is the principle that in a PCM setting, homogeneous goods will be sold for the same price in two markets, taking into account the exchange rate. If price differences appear, people will by where the product is cheap and sell where the product is expensive. The exchange rates will change in order to keep prices equal to avoid speculations. The absolute PPP requires identical baskets of goods.

· Historical Exchange Rates: way of evaluating the current exchange rate is to look at their historical development. Political and economic changes in the environment also influence the exchange rates. Historic analysis gives some indication of when the current rate is below or above the historic rates.

Factors of exchange rates

Fixed exchange rates are chosen by central banks and they may turn out to be more or less accepted by financial markets.

Changes in floating will be influenced by three broad categories of determinants:

· Trade balance:Exports, imports and their difference (the trade balance) influence the demand of currency aimed at real transactions. A rising trade surplus will increase the demand for country's currency by foreigners, so that the national currency will appreciate.

· Interest rate (cost of capital): Higher interest rates attract capital from abroad and the currency should appreciate. Decisive would be the difference between domestic and foreign interest rates, thus a reduction in interest rates abroad would have the same effects.

· Inflation rate: high inflation should be accompanied by depreciation (high prices, lower export, and lower demand for currency).

· Demand for exported products

· The business environment: positive indications (in terms of government policy, competitive advantages, market size, etc) increase the demand of the currency, as more and more entities want to invest there.

· Political Factors: All exchange rates are susceptible to political instability and anticipations about the new ruling party.

7. Foreign exchange regulation: purposes and instruments.

The foreign exchange market is the market on which foreign currencies are bought and sold. The Foreign Exchange market, also referred to as the "Forex" or "FX" that market is the largest financial market in the world. FOREX is global decentralized market which virtually operates around the clock. It facilitates the transfer of purchasing power denominated in different currencies. The foreign exchange market is not a physical place/location; rather it is an informal arrangement between large commercial banks and foreign exchange brokers for buying and selling foreign currencies.

Despite the importance of this market foreign exchange remains a largely unregulated business. Although foreign exchange has traditionally been regarded as the exclusive domain of the biggest banks and corporations, recent trends made it important for foreign exchange be regulated.

Transactions in the foreign exchange market can be broadly classified into two types – commercial and speculative. A commercial transaction: is one that is backed by an economic activity, such as payment for an import. A speculative transaction: undertaken purely to make a profit from currency moves. Speculative transactions greatly exceed commercial transactions. Commercial transactions accounted for only 13% of daily total forex volume in 2012.

While regulation in forex markets was virtually non-existent in earlier years, the rapid growth of forex trading among retail investors has led to increasing scrutiny and regulation by bodies such as the Commodity Futures Trading Commission (CFTC).Some of the foreign exchange markets are regulated by governmental and independent supervisory bodies.

For a retail FOREX trader, the biggest risk of non-regulation is that of illegal activity or outright fraud. The objective of regulation is to ensure fair and ethical business behavior. In their turn all foreign exchange brokers and signal sellers have to operate in strict compliance with the rules and standards laid down by the Forex regulators, otherwise their activity is regarded as unlawful.

· Brokers must be registered and licensed in the country where their operations are based, which ensures quality control standards are met.

· Brokers are subject to recurrent audits, reviews and evaluations which force them to maintain the industry standards.

· Foreign exchange brokers must keep a sufficient amount of funds to be able to execute and complete foreign exchange contracts concluded by their clients and also to return clients’ funds intact in case of bankruptcy.

Major principles of forex regulation in Russia:

1. Priority of economic measures in the process of forex market regulations

2. Government should not interfere into the forex market without special need

3. The unity of internal and external currency policy

4. The unity of systems of currency regulations and its control

5. Government must defend the rights of participants of the forex market