The exchange rate is also known as the exchange rate.
Exchange rate is the exchange rate association that can be established between two currencies of different nations . Also known as the exchange rate , this data allows us to know how much of a currency X can be obtained by offering a currency Y. In other words, the exchange rate indicates how much silver can be purchased with foreign currency from another country.
In this way, for example, we can know how much a euro is equivalent to in dollars and vice versa. Thus, we know that one euro, the currency that is legal tender in most European Union countries, at this time (April 2023) is equivalent to approximately 1.09 United States dollars. This operation becomes fundamental so that different nations can carry out economic transactions between their companies.
Exchange operations (that is, the purchase and sale of multiple currencies) can be carried out in banks and exchange offices , which generally quote two types of exchange: one for purchases and one for purchases. the rest, for sales. For example: if I want to buy dollars, the price I must pay to the exchange house is 3.47 pesos for each dollar. On the other hand, if I want to sell the same currency, I will get 3.44 pesos for every dollar I deliver.
Real and nominal exchange rate
Two types of exchange can be mentioned: one known as the real exchange rate and another called the nominal exchange rate .
The real exchange is that which determines the equivalence by which a subject can carry out an exchange of benefits or goods of one nation for those of another. The nominal exchange rate , for its part, is based on the equivalence between a certain currency and a foreign currency. It is the exchange rate that is contemplated in banks and exchange houses.
In the same way, we cannot ignore that there is another classification or terminology that determines the exchange rates existing in the market . Thus, we also talk about what is known as the buyer exchange rate , which is the price paid by the aforementioned exchange house or the relevant banking entity. And there is also the selling exchange rate , which refers to the price for which it sells.
The exchange rate reveals the exchange rate association that exists between two currencies of different countries.
The Central Bank
The Central Bank of each nation can choose between multiple exchange rate systems. The fixed exchange rate is established by the Central Bank (the institution decides the price of the currency). On the other hand, the so-called floating or flexible exchange rate allows values to be established based on the system based on supply and demand .
At this time, it must be established that the basis of exchange rate operations has the dollar as its backbone or axis. However, throughout history this has not always been the case because at first the currency that was taken as the fundamental pillar was the pound sterling , it was the one that determined the exchange rate.
However, this fact was completely modified during the Second World War . And during this war conflict, England was devastated by it and this caused its aforementioned currency to lose value, which is why it was replaced in this economic and exchange sphere by the aforementioned dollar.