Determination of Exchange Rate
Known worldwide for their public meetings of international figures in trade and commerce, the Bretton-Woods Conference, the Louvre Agreement and the Smithsonian Agreement addressed complicated subjects like exchange rates.
The exchange rates of different currencies are fixed differently by different countries in a liberalized and globalized world. An exchange rate is decided by a nation's policy in a free market.
In commerce, advanced students need to understand exchange rates and how they fluctuate every day, and sometimes even hourly. It is determined by the exchange rate how many units of one currency can be exchanged for another currency.
There is no single and universal currency in our globalized world despite free and fair trade agreements. All countries dealing in the sale and purchase of goods and services encounter this stumbling block. It wasn't until the second half of the 20th century, after the Second World War, that exchange rates were introduced.
Intercountry trade grew rapidly, and financial mechanisms were modified accordingly.
How Exchange Rates are Determined
To determine its currency's exchange rate, every country has its own methodology. Several methods can be used to decide the exchange rate, including fixed exchange rate, managed floating exchange rate, and flexible exchange rate.
Flexible Exchange Rate
It is sometimes referred to as a pegged exchange rate system since governments tend to keep an eye on exchange rates. The currency value is pegged either to certain currencies- either individually or collectively- or to its reserves of gold and foreign currencies.
As far as fixed exchange regimes are concerned, China is probably the most famous example. There was also a fixed rate regime under the former Soviet Union. The exchange rate is not solely determined by market forces under this regime. When the foreign exchange market fluctuates widely, the central banks will sell or buy reserves.
Floating Exchange Rate
An exchange rate that fluctuates or is flexible is called a floating exchange rate. The market determines whether it moves or not. The term "floating currency" refers to any currency subject to a floating regime. The US dollar is an example of a floating exchange currency.
Floating exchange rates are popular among economists. Those who believe in a free market believe that currency value should be determined by the market. USD prices tend to decline when crude oil prices rise, for example. The two are inversely related.
The USD value fluctuates freely since oil prices vary daily.
Economists claim that markets correct themselves frequently. Most major economies are largely dependent on floating exchanges thanks to little government intervention. In popular parlance, these are countries commonly called 'First World Countries'.
Speculation
Every nation has money as an asset. Indians will care more about the British pound's value than they would about the rupees if they believe the rupee will go up in value. As a result, when people hold foreign exchange hoping to reap the benefits of rising currency values, the exchange rates are also affected.
Exchange Rate and Interest Rates
Furthermore, the difference between interest rates between nations plays a role in determining the exchange rate. In search of the highest percentage interest rate, banks, MNCs, and affluent individuals move billions of dollars around the globe.
Exchange Rates in the Long Run
Purchasing power parity or PPP can be used to make long-term predictions on the exchange rate in an exchange rate structure which is flexible. As per the theory, if a business has no frontiers to cross such as taxation (tariffs on business) and quotas (quantitative controls on imports), then exchange rates must gradually adjust so that the same products cost the same price regardless of whether you're translating into rupees in India, yen in Japan, or dollars in the US, apart from the different modes of transportation.
Pegged Float Exchange Rate
There are three hybrid regimes in this system. Governments and Central Banks can control foreign exchange rates by intervening in the markets. However, exchange rates are mostly determined by existing market forces.
There are 3 types:
Crawling Bands:
A central bank will allow fluctuations in a currency until a specific range that is usually set in advance. The authorities will intervene once the range is breached. These ranges are determined by monetary and economic policies.
Crawling Pegs:
As a result of the system, the Central Bank allows its currency to appreciate or depreciate gradually on international markets. The currency will have the capability to float if there are any market uncertainties. However, the authorities will intervene if appreciation or depreciation are swiftly followed by one another. This has already happened in Argentina, Vietnam, and Costa Rica.
Horizontally Pegged Bands:
It resembles crawling bands a bit. Nevertheless, Central Banks allow their currencies to fluctuate much more freely, provided that the exchange rate does not exceed 1% of the gross value of its currency.
FAQs on Express vs. Implied Warranties: Differences Explained
1. What is the main difference between an express warranty and an implied warranty?
The primary difference lies in how they are created. An express warranty is a specific promise or statement made voluntarily by the seller, either verbally or in writing, about the product's quality, condition, or performance. In contrast, an implied warranty is an unwritten, unspoken guarantee that automatically applies to goods sold, based on legal statutes like the Sale of Goods Act, 1930 in India.
2. Can you provide a real-world example of an express warranty?
Certainly. A common example of an express warranty is when a laptop manufacturer states on the product's box or in an advertisement, "This laptop comes with a 2-year warranty covering all hardware defects." This is a direct, explicit promise made by the seller to the buyer, which is legally binding.
3. What is a common example of an implied warranty?
A classic example is the implied warranty of merchantability. When you purchase a new electric kettle, it is implied that the kettle will be safe to use and capable of boiling water. Even if the seller never states this, the law implies this guarantee. If the kettle fails to perform this basic function, the seller has breached this implied warranty.
4. What are the key types of implied warranties under Indian commercial law?
As per the Indian Sale of Goods Act, 1930, several implied warranties are crucial for consumer protection. The main types include:
- Warranty as to Quiet Possession: The buyer has the right to possess and use the goods without disturbance from the seller or any other person.
- Warranty as to Freedom from Encumbrances: The goods are free from any charge or claim from a third party that was not declared to the buyer at the time of sale.
- Warranty as to Quality or Fitness by Usage of Trade: If it's a common practice in a particular trade, an implied warranty regarding the quality or fitness for a specific purpose may be attached to the goods.
5. How does a 'warranty' differ from a 'condition' in a contract of sale?
This is a fundamental distinction in commercial law. A condition is a stipulation that is essential and core to the main purpose of the contract. If a condition is breached, the buyer has the right to repudiate the contract (cancel it) and refuse the goods. A warranty, however, is a collateral or secondary stipulation. If a warranty is breached, the buyer can only claim damages for the breach but cannot reject the goods or cancel the entire contract.
6. What is the legal remedy if a seller breaches an express warranty versus an implied warranty?
The legal remedy for the breach of both an express warranty and an implied warranty is the same. In either case, the buyer is entitled to sue the seller for damages resulting from the breach. The buyer cannot, however, reject the goods or treat the contract as cancelled, as the breach of a warranty is not considered a breach of a core contractual term.
7. Why are implied warranties legally necessary even when a product has no written guarantee?
Implied warranties are legally necessary to provide a baseline of consumer protection and ensure fair trade. They exist to hold sellers accountable for the basic quality and usability of their products, protecting buyers from latent defects or goods that are not fit for their intended purpose. Without them, a buyer would have no recourse if a product was fundamentally flawed, unless the seller had made a specific express promise.
