Features of Exchange Rate

Features of exchange rate includes all the features of currency of any country  which is to be traded in foreign exchange market. If you are beginner in forex market, you should know first the meaning of exchange rate and then you should know its features.

What is exchange rate?

Exchange rate is a rate at which one currency will be exchanged into other currency. For example today rate of One USA dollar can be compared with Indian Rupees.


Exchange rate will be always conversion rate of stronger currency to your currency. For getting 1 US $, you will have to pay Rs. 44.89. So, this is exchange rate.


Features of Exchange Rate 

1. Exchange Rate always fluctuates Due to Stronger or Weaker of  Currency :

It is the main feature of exchange rate that it always fluctuates. If our currency will strong at that time, our exchange rate will differ from previous exchange rate. Suppose, today, one dollar's exchange rate is 44.89. If tomorrow, our currency strong, we have to pay less for buying one dollar. It may be Rs. 43 or Rs. 42 for one dollar. This shows also the appreciation of our currency. Weaker of our own currency means depreciate our currency. At that time, we have to give more money for buying one dollar. It may be Rs. 46 or Rs. 47.

2. Exchange rate always are affected from balance of payment and trade, interest rate (inflation rate), economic growth and fiscal and monetary policies and political issues:

Exchange rate of any currency are affected from balance of payment and trade. More negative balance of trade will depreciate our currency. In future, if our balance of payment will be surplus, at that time, we can compare Rs. 1 with number of dollars in exchange rate. There are also lots of other factors which affect any currency exchange rate like interest rate or inflation rate, economic growth, fiscal and monetary policies and political issues

3.  Exchange rate are two types, one is buying exchange rate and other is selling exchange rate:

If we talk about the feature of exchange rate mechanism, we should know that exchange rates are of two types. One is buying exchange rate and other is selling exchange rate. Both rate may or may not be equal. 


4. Bid Vs Offer  


 Prof. Tim Bennett  has explained about bid and offer feature of exchange rate in his video lecture "Beginner's guide to investing: the currency market" that bid and offer always will be different. He explained this with an example, "Suppose we compare BP with USD and its bid may be 1.61863 USA dollar for every  one British pound  and its offer may be 1.61867 USA dollar for every one British pound. One more interesting thing, he explained in his video that bank's  buy rate always will be your sell rate in bid and bank's sell rate will be your buy rate in offer.


Related : Hedging in Foreign Exchange Market

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Accounting Education: Features of Exchange Rate
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