Currency Exchange Rate Explanation
Rates of Currency exchange, also termed as FX rates or Forex rates, between any two currencies refers to total worth of a particular currency relative to the other. In simple words, it is explained as value of any foreign currency relative to currency of the native country. For instance, an FX rate of 90 JPY (¥) to USD ($) implies that 90 Japanese Yens are equivalent to a single US Dollar.
Rates of Currency exchange are of two main types, as follows:
- Rates for Spot Exchange: These rates refer to the rate of exchange at the moment.
- Forward FX Rates: They refer to FX rates traded and quoted at the moment, but for payment and delivery on some pre-determined date in future.
For free-floating currencies, the Forex rates of a particular currency are allowed to fluctuate against those of foreign ones, and are ascertained by demand and supply forces prevailing in the market. Thus, the free-floating FX rates change almost continually, as indicated by banks all over the world on their respective financial markets. Fixed rates of currency exchange, on other hand, are ascertained by an adjustable or movable peg system. However, this system does not offer any provision for currency devaluation.
FX rates are further categorized into effective and bilateral types. While the former is just the weighted mean of a set of all the foreign currencies, the latter involves a major currency pair. The currency rate fluctuations happen every time the absolute worth of one or both the component currencies gets changed. The value or worth of the currency increases if it has a higher demand due to enhanced speculative and transaction demands for money.
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