Understanding Currency Exchange Rates
What are Exchange Rates?
Exchange rates represent the value of one currency in terms of another currency. These rates fluctuate constantly based on various economic factors, including inflation rates, interest rates, political stability, and economic performance.
Types of Exchange Rates
- Spot Rate: The current market rate for immediate exchange
- Forward Rate: Rate agreed upon today for future exchange
- Fixed Rate: Rate pegged to another currency or basket of currencies
- Floating Rate: Rate determined by supply and demand in the forex market
Currency Terms Glossary
- Base Currency
- The first currency in a currency pair, shown as the amount of counter currency needed to buy one unit of base currency.
- Exchange Rate
- The rate at which one currency can be exchanged for another.
- Forex
- Short for foreign exchange, the global marketplace for exchanging national currencies.
- Currency Pair
- The quotation of two different currencies, with the value of one currency being quoted against the other.
Factors Affecting Exchange Rates
- Interest rates and inflation
- Political and economic stability
- Government debt
- Terms of trade
- Speculation and market sentiment