Foreign exchange rate: How can it affect your overseas travel plans? An

# Foreign exchange rate: How can it affect your overseas travel plans? An explainer

Updated: 06 Sep 2022, 08:17 AM IST
TL;DR.

## The predetermined rate at which one currency is exchanged for another is known as the foreign exchange rate. Depending on economic circumstances, the exchange rate may increase or decrease. Let us discuss it in detail below.

The predetermined rate at which one currency is exchanged for another is known as the foreign exchange rate.

How do you convert 1 meter into centimeters?

Simple. We know that 1 meter is equal to 100 centimeters. So you simply multiply 2 with 100.

Therefore, 2 meters= 200 centimeters.

This was easy, right?

But why are we talking maths?

To understand that how knowing the conversion rate, simplifies the calculations for everyone.

If you are planning to travel abroad anytime soon, you must know that there is an exchange rate which helps you convert your domestic currency into the foreign one. Let us understand it in detail.

## What is foreign exchange rate?

The predetermined rate at which one currency is exchanged for another is known as the foreign exchange rate. An exchange rate is the ratio between two currencies' values. To put it simply, "It is the amount of one currency that may be exchanged for another."

You will typically encounter adjustable exchange rates while converting currencies. In other words, depending on economic circumstances, the exchange rate may increase or decrease.

A foreign exchange market, also known as "forex," sets the variable exchange rates between currencies. These markets control the exchange rates at which investors buy one currency for another, hoping to profit when the value of the latter country's currency increases.

## What are the types of exchange rate?

### Fixed exchange rate

The term "fixed exchange rate system" refers to an exchange system where the exchange rate is set by the government or another monetary authority. The market forces do not control it. The central bank exchanges its own currency for the currency to which it is linked on the foreign exchange market in order to keep the local exchange rate stable.

### Floating exchange rate

A flexible exchange rate system is one in which the exchange rate is based on the supply and demand of funds in the market. It flexible exchange rate system permits unrestricted currency value fluctuations in response to shifts in the supply and demand for foreign currencies. When it is important to maintain stability and prevent inflation in a floating regime, the central bank may also step in to help; however, this happens less frequently.

The market dynamics of supply and demand determine the fluctuating exchange rates for practically all currencies. Let's take a closer look at the variables that influence the foreign exchange rate.

## Why is the foreign exchange rate variable?

The market forces that determine foreign currency rates may be influenced by a variety of factors. Various economic, political, and even psychological issues are among the contributing elements. The economic elements include the trade balances, inflation, and forecast for economic growth, as well as the economic policies of the government.

Political events, such as political instability and political wars, can weaken the value of a currency, therefore they have a big impact on the forex rate as well. Exchange rates can also be impacted by players' mentality on the forex market.

The forex market involves more than just the straightforward exchange of one currency for another. A wide range of financial instruments, such as forwards and options, are often used in major market transactions.

Forex trading includes buying and selling of international currencies.
First Published: 06 Sep 2022, 08:17 AM IST