What Is An Exchange Rate?

Everyday you hear something about foreign exchange markets, forex exchange rates or FX, but what is it exactly? In this article you will have some bits of information that will help you understand the meaning of Exchange Rate.

First you should understand what an exchange rate is exactly. To simplify the definition of exchange rate: this means that a rate for exchanging one currency for another. The price of the exchange rate is the currency. Like every merchandise or service it has its own price.

It means that a specific country's currency has a specific value equivalent to another currency of a country. You have to be careful of the distinct exchange rates if you travel to another country; you have to purchase the currency of that country that you are in. Lets say, you are from Germany and you travel to the United States, the exchange rate is $1.10 for 1 Euro, it means that you can purchase more than a dollar for your Euro.

If you are troubled about how much you can purchase for your currency in other country, you ought to know that one merchandise's price should theoretically remains similar, heedless to say, the currency is used to appraise its value. The cause for this is that the exchange rate is holding the value of the currency at its own degree.

There are two ways to set exchange rate. The first one is the fixed rate. Fixed rate is being maintained and fixed by the central bank of a country and it is regarded to be the authorized exchange rate for that specific country.

Level's price for the currency is being defined by comparing the price to a major currency like the US dollar or Euro. The central bank is selling and buying its own currency for keeping the exchange rate at the degree which it has been previously set.

The second way of setting the exchange rate is called the 'floating' method. This defined the exchange rate by using the balance of supply and demand for a specific currency on a private market.

This method of exchange rate is oftentimes called 'self-correcting' since the market is mechanically correcting the differences between the demand and the supply of a currency. This type of exchange rate is perpetually being altered based on the levels of the supply and demand.

Finally, no exchange rate is being defined completely on a fixed or floating method. The combination of these two settings of exchange rates is regularly used to set a specific currency's price for an exact value of the currency.