Types of Forex Rates

The Forex market is a highly volatile and liquid market with huge volumes of trade happening in a day. The volumes being traded in a Forex market is three times bigger than the huge New York Stock exchange. This is proof enough to explain the size of the Forex markets. Forex trading is nothing but dealing with various currencies and making the most of currency fluctuations. Enjoying the leverage of currency fluctuations is the main objective of any Forex trader. There are various types of Foreign Exchange Rates that are available in the market. They are:

1. Currency Band
2. Exchange Rate
3. Exchange Rate Regime
4. Fixed Exchange Rate
5. Floating Exchange Rate
6. Linked Exchange Rate

Currency Band – This is nothing but the tolerance limit between a floating and fixed foreign change rate. The traders can choose a band limit within which they can set their currency to trade in. However, if they observe that the value of their currency is going above the set currency band, then they can switch over to fixed exchange rate.

Exchange Rate – Exchange rate is a term used to define one currency’s worth in the eyes of the other currency. This is the most common term used in the Forex market and it is the most basic term as well. Traders should first understand the intricacies of the term exchange rate, the risks involved in it etc, before entering into trading.

Exchange Rate Regime – Exchange rate Regime is closely related to the financial policy of a country. It is the way in which a country manages its currency based on the denominations of another country’s currency. Checks are kept in place, political and economic factors are kept under check to ensure that the currency of a particular country does not devalue.

Fixed Exchange Rate - Fixed Exchange Rate is also called Pegged Exchange Rate. This is the process where a country’s currency is matched to another country’s currency, or to group of currencies or to a particular commodity. This helps in bringing one country’s currency in line with currencies of other nations, thereby leading to smooth transactions in the Forex market.

Floating Exchange Rate – Here, a country’s currency is allowed to fluctuate according to the trends of the Forex market. There are no set conditions and the currency is not driven to ape another currency’s model. The advantage of floating exchange rate is that, one country’s adverse political condition will not affect another currency. However the demerit of this is that, there is no stability when currencies fluctuate with no limitations. This is the place where the central bank comes into play. The central bank regulates the fluctuations of a particular currency and ensures that no undue swinging is done.

Linked Exchange Rate – As the name indicates, the linked exchange rate is the process where, one country’s currency is lined to another country’s currency to bring stability between both countries. The linked exchange rate mechanism proves to be quite handy in controlling undue fluctuations between currencies.