We all know the basic use of currency, how to use it, where to use it, how much to use etc. But very few of us know all the details about currency. What is the actual definition of it?? Why different currency has different value? What is foreign exchange or Exchange Rate? How it affects a country’s economy? Well to know all these read this blog. Here we have tried to provide a brief details about currency and exchange rate in simple terms.
WHAT IS CURRENCY?
First and foremost, it’s an unit of exchange. That means you use it to get other stuff. It is portable and a certain type of currency is accepted with in a certain country only. It also has to be divisible so that you can pay exactly what is owed without rounding up and overpaying. In order to be divisible, they come in different denominations.
DENOMINATIONS OF THE EURO, THE DOLLAR AND THE RUPEE
In both the Euro and the Dollar there are seven paper notes. The Euro calls them banknotes and they are the 5, 10, 20, 50, 100, 200, and 500. The Dollar calls them federal reserve notes and there is the 1, 2, 5, 10, 20, 50, and 100. When it comes to coins, the Euro has eight and the Dollar has six. The 2 euro, 1 euro, 50 cent, 20 cent, 10 cent, 5 cent, 2 cent and 1 cent. The dollar has 1 dollar, 0.5 dollar or half dollar, 0.25 dollar or quarter dollar, Dime, Nickel and penny. In paper note the Rupee has 2000, 500, 200, 100, 50, 20, 10, 5, 2 and 1 rupees. In coins it has 10, 5, 2, 1, 0.50, 0.25.
You must have heard that the price of the US dollar has changed from rupees 50 to rupees 60 in over a month. This prices are not fixed by the Indian or the US government. So how it is determined then?
HOW THE PRICE OF A CURRENCY IS DETERMINED?
- The price of a currency is closely tied to demand and supply. When the demand increases for goods, services and investments that are paid for in US dollars the price of the US dollar goes up. On the other hand if the American central bank chooses to print more dollars and thereby increase the supply; dollar prices tend to decrease.
- An important role is played by speculations also. If major players in the financial market believe that the value of the US dollar is likely to rise; they buy more of the currency thus leading to a rise in its price.
- Economic and political conditions of the issuing country also affect the price of the currency. If the country is going through a political conflict or an economic crisis then the value of its currency may go down.
- The value of a currency is also linked to the future prospects of its issuing country. A country is said to have good future prospects if it has inflation & unemployment under check and sound economic policies.
Thus we can say that the price of a currency is the result of not one but several factors.
But why we need to convert one currency into another? What is an Exchange Rate??
WHAT IS AN EXCHANGE RATE
- Exchange rate is the value at which one currency may be converted into another. It is used when we need simple conversion of one currency to another; like for traveling to another country, for engaging in speculation or trading in the foreign exchange market etc. In finance; an exchange rate is also known as a foreign-exchange rate or forex rate.
- It is also regarded as the value of one country’s currency in terms of another currency. For example an interbank exchange rate of 72 Indian Rupees to the United States dollar means that 72 rupees will be exchanged for each US dollar or that one US dollar will be exchanged for each 72 rupees.
- Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers where currency trading is continuous (24 hours a day except weekends).
TYPES OF EXCHANGE RATES.
- The spot exchange rate refers to the current exchange rate.
- The forward exchange rate refers to an exchange rate that is quoted and traded today but delivery and payment is done on a specific future date.
Thank you for reading. We hope that this has helped you in gaining some knowledge about Currency and Exchange rate. If you liked it please comment below.
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