Question

Analyze the concept of exchange rate. Explain how the dollar price of euros is determined.

Answer 1

EXCHANGE RATE: - It is the price of one currency in terms of another currency. It can be either fixed or floating. Fixed exchange rates are decided by central banks of a country whereas floating exchange rates are decided by the mechanism of market demand and supply. Forex traders on the foreign exchange market determine exchange rates.

The value of Euro is determined by the value of money. It can be determined by purchasing the foreign currencies or by the treasury notes which can be converted easily into dollars through the secondary market for Treasuries. It could also be determined through foreign exchange reserves. That is the amount of dollars held by foreign governments.