You might have been searching the meaning of exchange rate for a long time. Exchange rates simply mean what will be the value of the currency of one’s own country with other countries? Like other goods, currency can be purchased and sold. You need to know the rate of exchange when you buy, sell or convert your money.
Exchange rates are very essential in international trade, because without it, trading would be very difficult. If you are traveling to another country that recognizes a different currency, you might also find it difficult to convert your money without the rates of exchange. It should be noted that in many countries, only that particular country’s currency is allowed to be used. You cannot make any transaction without that particular currency and without the rates of exchange, it will also be impossible to determine the value of a certain currency when compared to the other.
If the currency that you are holding is Yen and you would want to have another currency like the Euros, you should buy this currency. The company or individual, who provides you with the Euros in exchange for your Yen, is referred to as the seller. This exchange of money is based generally on a price that is recognized internationally, which is called the exchange rates. If, for example,
In general, there are 2 systems in determining the rates of exchange; one of these is the fixed rate, which, despite market factors, remains the same. A fixed rate of exchange is also called the pegged rate. This system happens when a country fixes or pegs its currency to the exchange of a widely recognized currency, such as a Euro or a US dollar. The pegged currency is the weaker one, while major currencies float; they are not fixed or pegged. The exchange rates will be in continual change unless a currency is fixed against another different currency.
However, it is not always that currencies are pegged, so their values will be fluctuating constantly. The rates of exchange may move against or in favor of a certain currency and can result in either losses or profits. It will depend on the time that you had the money converted and also the type of currency that you are exchanging.
There are reasons why people buy and sell currencies. Some of these people would like to earn a profit from doing the foreign exchange currency trading. Others engage in the buying and selling of currencies for use of their businesses; they might need different types of money to conduct their business transactions in foreign countries. As always said, rates of exchange can change in a very short time, perhaps by the minute or hour, affecting the value of different currencies. To increase the chances of earning a profit, people often go to the Forex (foreign exchange or FX) market.
Because of fluctuating values of the different currencies, many people who have been successful in trading currencies become Forex traders. These traders use their knowledge of the rates of exchange to their advantage. They buy currencies while the prices are low and then sell them for other currencies, when they expect to make a profit out of the sale.