An exchange rate is the rate at which two currencies specifies how much one currency is worth in terms of the other. In other words, it is the value of another country’s currency compared to that of your own.
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply.
A fixed exchange rate, sometimes (less commonly) called a pegged exchange exchange rate, is a type of exchange rate regime wherein a currency’s value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value. As the reference value rises and falls, so does the currency pegged to it.
A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate.
A floating exchange rate or a flexible exchange rate is the opposite of fixed exchange rate. It is a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market.
It is determined by the private market through supply and demand. It is a country’s exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market.
