Exchange Rate – Definition

Cite this article as:"Exchange Rate – Definition," in The Business Professor, updated September 24, 2019, last accessed August 9, 2020, https://thebusinessprofessor.com/lesson/exchange-rate-definition/.

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Exchange Rate Definition

An exchange rate refers to the value of one currency in relation to another currency. It is the rate at which a currency will be exchanged for another currency. In finance, an exchange rate reflects the worth of one currency over others or when compared to the others. Exchange rate is important in international trade and relations, when there are two currencies involved in  trade, exchange rate is important. It is important that exchange rate fluctuates as it is affected by several economic factors.

A Little More on What is an Exchange Rate

There are several types of exchange rate, they include the following;

  • A currency peg: this is the actual rate a country pegs its currency against another. The exchange rate stays within the range of the peg.
  • A free-floating exchange rate: which is influenced by changes in the exchange market, this exchange rate rises and falls.
  • Onshore rate: This is the rate a currency is exchanged within the country’s border.
  • Offshore rate: This exchange rate is used outside of the country’s border. It is used for trades outside the country.
  • Restricted currencies: This refers to rate restricted within the country’s border.
  • Spot and Forward rate: The spot rate of a currency is the current market value or cash value of the currency while the forward value is the rate of a currency depending on if it rises or falls in relation to its spot price.

Here are some important points to know about an exchange rate:

  • An exchange rate is the value of a country’s currency in relation to another currency.
  • It refers to the rate at which a currency is exchanged for another currency.
  • There are many types of exchange rates but most countries use the free-floating exchange rate which is determined by supply and demand in the market.

Real World Example of How Exchange Rates Work

At a time in 2019, you need $1.13 to buy €1, presently, with $1, you can get €0.91. This means if you have $150, you get to exchange it for €136.5.

Given that;

$150 * 0.91 = €136.5

The above illustration is applicable to all other currencies, all you need to get is the exchange rate of each currency and multiply by the value at hand. For instance, $1 will give you 110 yen. Hence to change $350 to yen, you have;

$350 * 110 =  ¥38,500.00

References for “Exchange Rate”

https://www.investopedia.com › Trading › Forex & Currencies

https://www.thebalance.com › … › US Economy › Trade Policy › Exchange Rates

https://en.wikipedia.org/wiki/Exchange_rate

https://economictimes.indiatimes.com › Definitions › Economy

www.businessdictionary.com/definition/exchange-rate.html

 

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