Currency exchange: floating rate vs. fixed

Currency exchange: floating rate vs. fixed

Did you know that the foreign exchange market (also known as forex or FX) is the largest market in the world? In the fact more than 5.4$ trillion is traded in the currency traded market daily basis. This article is certainly not a primer for currency trading, but it will help you understand exchange rate and fluctuation.

What the exchange rate?

An exchange rate at which in currency can be exchanged for another. In other words, it is the value of another country, you need to buy the local currency just like the price of any assets, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, the exchange rate for us dollars 8.88 Egyptian pounds. Theoretically, identical assets should sell at the inherent value of one currency against other.

"Fixed exchange rate"

There are two ways the price of currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S dollar, but also other major currencies such as the Euro, the yen or basket of currencies). In order maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market.

"Floating exchange rate"

UN like the fixed rate, a floating exchange rate is determined by the private market through supply and demand. a floating rate is often termed "self-correction", as any differences in supply and demand will automatically be corrected in the market look at this simplified model: if demand for a currency is low , its value will decrease thus making imported goods and services . This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.