Exchange rate definitionExchange Rate Definition

What is an Exchange Rate, and How to Calculate it?

An exchange rate is the value of one currency expressed in terms of another currency. It represents the amount of the second currency that is needed to purchase one unit of the first currency.

Exchange rates can be calculated using the following methods:

In the first method, the exchange rate is expressed as the amount of foreign currency per unit of domestic currency. For example, if the exchange rate is 1 USD = 1.25 CAD, it means that 1 US dollar can be exchanged for 1.25 Canadian dollars.

In the second method, the exchange rate is expressed as the number of units of domestic currency per unit of foreign currency. For example, if the exchange rate is 1 CAD = 0.80 USD, it means that 1 Canadian dollar can be exchanged for 0.80 US dollars.

Exchange rates can fluctuate and change frequently due to various economic, political, and market factors.

What is a Floating Exchange Rate?

A floating exchange rate is a type of exchange rate regime in which a currency’s value is determined by market forces, such as supply and demand, rather than by a fixed rate set by the government. The exchange rate can fluctuate freely, leading to changes in the currency’s value.