The exchange rate is the relationship that exists between the value of a currency or divided among a different one. The concept of exchange rate includes the total number of units that are needed of a currency to know how much is needed until obtaining the unit of another.
For this reason, the exchange rate is an indicator that is closely related to international trade, especially between countries that do not share the same currency.
How the exchange rate is classified
In legal matters, it is the Central Bank who is in charge of defining the most frequent exchange rates, with two exchange rate systems being the most common:
- Fixed exchange rate: it all depends on the central bank since in these cases a single body is responsible for defining the purchase and sale of the currency.
- Variable or non-flexible exchange rate: this is the case of those markets that are free and the exchange rate depends on supply and demand. As a consequence, it is frequent that there is some depreciation or imbalance that causes the values of the currency to change.