An exchange rate is the price of one country’s currency in terms of another country’s currency. It tells you how much of one currency you need to exchange for another.
Exchange rate = value of one currency expressed in another currency
Foreign Exchange rate (Forex)
Types of exchange rate systems
- Floating exchange rate
- Determined by supply and demand in the market
- Example: USD, EUR, JPY
- Fixed (pegged) exchange rate
- Currency is pegged to another currency or a basket
- Central bank intervenes to keep it stable
- Managed float
- Mostly market-driven, but central bank intervenes when needed
- Vietnam uses this system
Appreciation vs Depreciation
- Currency appreciation: Currency becomes stronger
- Currency depreciation: Currency becomes weaker
THE ETERNAL SOVEREIGN 