Exchange Rate

An exchange rate references the rate at which one currency can be exchanged for another, thus reflecting a relative price of a currency as expressed in another currency unit.. In some countries, central banks peg their exchange rates or allow them to trade within a band. In others, the exchange rate is free to float, thereby responding to supply and demand for a given currency. One way of measuring exchange rate changes is through the Uncovered Interest Parity (UIP) condition, which suggests that exchange rate changes are affected by the interest-rates difference among two countries. Higher rates in Country A will strengthen exchange rates of Country A’s currency against Country B.