What Exactly Is Exchange Rate?

What Exactly Is Exchange Rate?

Forex Exchange Rate

What is exchange rate? What is this thing that so many people end up talking about in so many markets in the world? What is this thing that controls the lives of millions of individuals? What is this thing that has transactions that go up to trillions of dollars?

Well, I will answer all of the above questions in this guide. An exchange rate happens to be the value of one nation’s currency, compare to the currency of another nation, or even an economic zone. It is basically the exchanging of currencies between one currency to another. For example, how many dollars does it take to purchase 1 pound? How many rupees does it take to purchase one US dollar? It is very simple. It takes 74 Indian rupees to purchase one US dollar. One pound is worth US$1.3; USD to GBP is basically 76p.

I am sure by now; you know that the exchange rate is basically the value of a country’s currency. Most of the exchange rates are very free-floating. The rise and fall, based on the demand and supply in the market. The rise and fall, every single day. A couple of years ago, one USD was worth 55 Indian rupees, but now it is worth 74 Indian rupees. In a lot of cases, it keeps increasing, which makes it harder for Indians in this case, because it is more expensive. Keep in mind that not all currencies are free-floating, because they have a lot of restrictions.

Forex Exchange Rate

There are many types of exchange rates.

The first one I would like to talk about is free-floating. A free-floating exchange rate basically rises and falls, because of the changes in the foreign exchange market. This is the most common type of exchange rate.

The next one is restricted currencies. Some countries actually have a lot of restrictions on their currencies, which limit their exchange within the country’s borders. Restricted currency can have its value set by the particular government. It loosely translates to the fact that you cannot purchase or sell this particular currency.

 

Another one is called currency peg. Sometimes, a country will peg its currency to that of another country’s. For example, the Hong Kong Dollar is pegged to the US dollar in a range of 7.75 to 7.85 which means that the value of the Hong Kong Dollar to the US dollar will remain within this particular range.

Did you know that exchange rates can be different in the very same country? In a lot of cases, there is some on show rate and an offshore rate which you should know about. Generally, a favourable exchange rate can actually be found within the borders of the country, versus outside the borders.

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