Fixed exchange rates - What are fixed exchange rates?
Definition: A fixed exchange rate is an exchange rate system in which one currency’s value is matched against another currency’s value.
Typically fixed exchange rates are used to pinpoint the value of one currency compared to another so that trade, investments and other transactions between two countries are easier to prepare and complete. Fixed exchange rates can also provide greater certainty for exporters and importers.
Fixed exchange rates in accounting
Similarly, companies that work internationally and deal in different currencies regularly can set fixed exchange rates for their base currency matched against the foreign currency they work with.
Setting a fixed exchange rate in your accounting system for e.g. one entire month can make things easier for companies since the exchange rate will be fixed - as opposed to changing every day. At the end of e.g. one month, the company can adjust for the currency fluctuation in their accounts.
Typically, companies can choose the fixed exchange rate as the average exchange rate from the previous month, these can be found on exchange rate websites such as XE.com.
Example in practice
For example, a UK company with suppliers in the US could set a fixed exchange rate for the current month at e.g. .625GBP:1USD and then make adjustments for fluctuation in their books at the end of the month.