Exchange rates
Exchange rate is the rate at which one currency is exchange
with another, it could also mean the value of one’s country currency in terms
of another countries currency, for example, in commercial banks NGN200 is
exchange for one unit of us dollar, and it means US$1 is equivalent to NGN200. Exchange rate is determined in foreign
exchange market. The foreign exchange market otherwise known as forex market is
opened 24hrs a day and all days except the weekends,
We have two type of
exchange rate the spot exchange rate and the forward exchange rate. The
exchange rate that is quoted and traded at that same business day is called the
spot exchange rate while an exchange rate quoted and meant to be traded in a
future date is known as a forward exchange rate, the spot exchange rate is the
exchange rate we normally see in our commercial banks, quoted on forex calendar
etc this exchange rate are what determine a country currency value and rate use
by travelers who wish to trade in foreign currency. But the forward exchange rate
is in form of future contract, conducted by two persons upon an agreed exchange
rate in future. Forward exchange rates are mostly done by hedgers, and
entrepreneurs who try to dodge the uncertainty in the currency they intend to
trade in the future.
Forex speculators
make money by predicting loss on a currency they trade against, if they
currency exchange rate get depreciated, forex speculators make their money away,
otherwise they lose money.
Currency value also
fluctuate in the foreign exchange market, it get appreciated when the demand
for it is higher than its supply, but when its supply is higher than its demand
than it get devaluated, this is why two currency exchange rate fluctuate,
Exchange rate is the purchasing power of any currency, the
higher the exchange the greater the purchasing power of the currency and the
lower the exchange rate the weaker
the purchasing power of the currency,
the real exchange rate is the purchasing power of one currency in
respect to another currency at the given exchange rate and market prices. It is
the unit of a country’s currency to buy a kilogram of goods in another country
at a given exchange rate and market prices.
For example the number of units
of us dollar that can buy a kilogram of
meat in Nigerian market is the exchange
rate of the US dollar to naira or the
number of unit of Nigerian naira that can buy a kilogram of meat in a US market
is the exchange rate of the naira
to US dollar.
Many country use to
manipulate their currency value to keep it at lower value, this give the
country an edge in the foreign exchange market, but a country that import
should have a higher exchange rate this is to decrease the price (actual market
value) of the imported goods whereas a country that export should have a lower
exchange rate this meant to give its product higher market value
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