4 types of exchange rates you need to know

To make an international investment it is necessary to have a good command of the exchange rate. The international foreign exchange market includes transactions made in the currencies of different countries. The price of one currency relative to another currency is called the exchange rate. Each monetary unit has a buying rate and a selling rate. Currency, defined as the currencies of foreign countries in its simplest definition, is used in commercial transactions between countries and is considered one of the most used instruments by investors. Recently, individuals, institutions and companies have made their investments in currencies. In this process, there are some concepts and issues such as the exchange rate and parity that concern the investor.

There are various types of exchange rates. The characteristics of each exchange rate are different. In this process, it is important for investors to do good research and have a good grasp of the subject in order to make serious profits. There are different types of exchange rates, and the exchange rate is divided into four: nominal rate, real rate, cross rate and effective rate.

- What is the nominal exchange rate?

- What is the real exchange rate?

- What is the cross rate?

- What is the effective rate?

4 types of exchange rates

Nominal rate

The value of foreign currencies against the domestic currency is called the nominal exchange rate. The nominal rate is considered one of the types of exchange rates that indicate the equivalence of 1 US dollar from another unit to a foreign currency. The monetary price determined at the nominal exchange rate concerns the domestic and foreign fields. That is, when the domestic and national currency appreciates, this value determines the amount of domestic currency that must be given to purchase any foreign currency in the international environment. In foreign currency transactions, two types of transactions can be made: spot and forward.

Real rate

The real exchange rate has almost the same characteristics as the nominal exchange rate. In more general terms, the real exchange rate is obtained by combining the ratio of the level of domestic and foreign prices to the nominal exchange rate. The real exchange rate is the rate that shows a country's value in terms of imports and exports. As with other exchange rates, many financial and economic factors influence the real exchange rate. In short, the real exchange rate system, which is an impressive and valuable indicator of the prices of valuable goods, value and value competition of countries in the international trade environment in the field of finance and economics, is very significant.

Cross rate

The exchange rate of foreign currencies in terms of another foreign currency is called the cross rate. It is the value of any currency against another currency. All exchange rates in the world have a cross rate.

Effective rate

The currency used by other countries, in other words, foreign currency is called effective. The effective exchange rate is the value of the effective foreign currency in terms of the domestic currency. The value of a national currency is directly related to the foreign goods, services and financial values ​​that can be purchased with it.

To make a better investment, investors should know about these 4 types of exchange rates. As ALB Limited, we aim to provide you with the best service. Follow us to learn more about the exchange rate and its types and to take advantage of our current services.