Question

What do you understand by Foreign Exchange Rate? What are its various types?

Hint:

Remember the trio: fixed, floating, and managed float—plus spot/forward as transaction timings.

Answer 1

Meaning: The foreign exchange rate is the price of one currency in terms of another (e.g., ₹ per US\$). It determines how domestic prices translate into foreign prices and vice versa, affecting trade, capital flows, and macroeconomic stability.
Types: (i) Fixed (pegged)—the central bank commits to a parity (often to a major currency or basket) and intervenes to maintain it. (ii) Flexible/Floating—market forces of demand and supply determine the rate; the central bank does not target a specific level. (iii) Managed float (dirty float)—rate largely market-determined but the central bank occasionally intervenes to smooth volatility. (iv) Dual/multiple rates—different rates for distinct transactions (now uncommon).
Related distinctions: Spot vs forward rates (immediate vs future delivery) and nominal vs real exchange rate (inflation-adjusted).