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Types of Exchange Rate in Forex Market

An exchange rate regime is how a nation manages its currency in the foreign exchange market. Below are define the various types of the exchange rate.

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Types of Exchange Rate in Forex Market

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  1. Types of Exchange Rate in Forex Market

  2. Index • Types of Exchange Rates • Foreign Exchange Risk • Risk Management

  3. Types of Exchange Rates [1] Fixed and Floating exchange rates 1. Fixed • The fixed exchange rate is the standard rate set by the monetary authorities of the Governance for one or more currencies. 2. Floating Exchange Rates • Under the floating exchange rate, the value of the currency is decided by supply and demand factors

  4. [2] Direct and indirect exchange rates 1. Direct method • Under the given number of units of local currency per unit of foreign currency is quoted. They are designated as direct rates because the rupee cost of single foreign currency unit can be obtained directly. Direct quotation is also called home currency quotation. 2. Indirect method • Under the given number of units of foreign currency per unit of national currencies is quoted. The indirect quotation is also known as foreign currency quotation.

  5. [3] Buying and Selling • Exchange rates are quoted as two-way quotes 1. For Purchase 2. And for Sale Transactions by the Bank

  6. 4. Spot and forward • The delivery under the foreign exchange transaction can be settled in one of the following ways 1. Ready or cash: To be settled on the same day. 2. Tom: To be settled on the day next to the date of the transaction. 3. Spot: To be settled on the second working day from the date of the contract. 4. Forward: To be settled at a date further than the spot date.

  7. Foreign Exchange Risk • Exposure to exchange rate movement. • Any sale or purchase of foreign currency net assets the net asset or net liability position of the buyer and seller. • Carrying net assets or net liability position in any currency gives rise to the exchange risk.

  8. Risk Management 1. Controlling losses • You could control your losses, by a mental stop or hard stop. Mental stop means that you already set your limit of your loss. A hard stop is your initiative to stop when you think you must to stop it. 2. Using correct lot size • As a beginning just use the smaller lots, you could stay flexible and logic than the emotions while you trade.

  9. 3. Tracking overall exposure • You go to short on EUR/USD and long on USD/CHF you exposed two times for the USD in the same direction. If USD goes down, you have a double dose of pain. So, keep the overall exposure limited it keeps you for the long haul for trading. 4. Bottom line • Trading is all about opportunities you must take action while the opportunities arise.

  10. Thank You

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