Currency is no doubt an essential element for a country. However, in order for all the countries with different currencies to trade with four another, a method of exchange rate between their currencies is needed; this method, is formally known as foreign exchange or money exchange.
In the early days, the method of money exchange is supported solely by the gold amount held in the vault of a country. However, this method is no longer appropriate now due to inflation and hence, the value of one’s money nowadays is determined through the market forces alone. In order to determine the value of a currency’s exchange rate, one main types of method is used which is floating money . For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export. Normally, this method is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms. These countries select to practice this method due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every method has its own flaw and so does the floating exchange rate method. Another form of exchange rate is known as pegged exchange rate. This is a method where the value of the exchange rate is fixed by the government of a country and not the supply and demand of the market. This method is called pegged exchange rate because the value of a country’s money is fixed to another country’s money. As a result, the value of the pegged money won't fluctuate unlike the floating money. However, there is a fatal flaw in this method where if the pegged exchange rate isn't controlled properly, panics may arise within the country and as a result of that, people will be rushing to exchange their money in to a more stable money. However, the truth is, most of the countries do not fully practice the floating exchange rate or the pegged exchange rate method in reality. The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific financial market because each day, over 1 trillion worth of money exchange takes place between investors, speculators and countries.
In the early days, the method of money exchange is supported solely by the gold amount held in the vault of a country. However, this method is no longer appropriate now due to inflation and hence, the value of one’s money nowadays is determined through the market forces alone. In order to determine the value of a currency’s exchange rate, one main types of method is used which is floating money . For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export. Normally, this method is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms. These countries select to practice this method due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every method has its own flaw and so does the floating exchange rate method. Another form of exchange rate is known as pegged exchange rate. This is a method where the value of the exchange rate is fixed by the government of a country and not the supply and demand of the market. This method is called pegged exchange rate because the value of a country’s money is fixed to another country’s money. As a result, the value of the pegged money won't fluctuate unlike the floating money. However, there is a fatal flaw in this method where if the pegged exchange rate isn't controlled properly, panics may arise within the country and as a result of that, people will be rushing to exchange their money in to a more stable money. However, the truth is, most of the countries do not fully practice the floating exchange rate or the pegged exchange rate method in reality. The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific financial market because each day, over 1 trillion worth of money exchange takes place between investors, speculators and countries.
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