Question

State whether true or false. exchange rate refers to value of one currency in terms of $.

Answer 1

The answer is FALSE.

This is because the currency value need not be always in terms of $. It can be in terms of any currency of any country. The exchange rate is defined as the value at which one country’s currency will be exchanged for another country’s currency. The exchange rate is decided in the foreign exchange market where there is active participation of various buyers and sellers.

There are two types of exchange rates – spot and forward. Spot exchange rate is used to denote the present exchange rate in the market. Forward exchange rate represents the exchange rate quoted and traded on the day that exchange is asked for but the actual transaction takes place at a later date.