Have you been to another country for travelling or study? What will be the first thing when you prepare? For me, it is money exchange.

I’d like to bring some cash with me when I travel, in case some shops don’t accept credit cards. Months before my trip, I would pay attention to the recent exchange rate. Sometimes different exchange rate really means a lot of money.

So, what is exchange rate?

In finance, an exchange rate is the rate at which one nation’s currency versus the currency of another nation or economic zone. It is also seen as the value of one currency in relation to another. For example, as of Dec. 26, 2019, the exchange rate of US dollar to RMB is 6.98, meaning that $1 will be exchanged for ¥6.98.

In the last few months, due to some political and economic reasons, the exchanger rate of US dollar to RMB fluctuates a lot. If you are lucky enough, then maybe you can earn some money in the foreign exchange market.

In most cases, the exchange rate is determined by the market, which can be influenced by political and economic incidents. The government of one nation or economic zone also has the authority to change exchange rate if needed.

There are several types of exchange rate.

Free floating exchange rate

Due to changes of the ration of supply and demand in the foreign exchange market, a free-floating exchange rate can rise and fall. The supply-demand relationship is often influenced by political and economic reasons.

Fixed exchange rate

The exchange rate is determined by the government and won’t be impacted of supply-demand relationship. It was widely used after World War II, under the Bretton Woods system. Not many countries use this kind of system now.

Currency Peg

Sometimes a country or an economic zone will peg its currency to that of anther country. For example, the HK dollar is pegged to the US dollar. The exchange rate of HK dollar to US dollar is fixed between 7.75 and 7.85, meaning that the value of HK dollar to the US dollar will remain within this rage.

If you are lucky and has an accurate prediction, then maybe you can earn a lot in the foreign exchange market.

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