We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are Exchange Rates?

By Felicia Dye
Updated: Feb 29, 2024
Views: 17,483
Share

Yen, euros, and dollars are all types of currency. Exchange rates refer to the prices of buying, selling, or converting money. Unless one currency is pegged to another, exchange rates are constantly in flux. Since these rates can change, thereby affecting the values of different currencies, many people turn to the foreign exchange (FX) market as a means to earn profits.

Without exchange rates, international trade would be very difficult. It would also be very difficult for a person from one country to travel to any other country that uses a different currency. These difficulties would arise from the fact that in most countries only one type of currency is widely accepted. Without that type of currency, transactions cannot take place. Without exchange rates, there would not be a system established that provided the value of one currency compared to another.

When a person has one type of currency, such as yen, and he wants another type of currency, such as euros, he must buy that money. The party that has a desired currency and provides it to the party who wants it in exchange for another type of currency is the seller. The exchange is generally conducted based on an internationally recognized price known as the exchange rate. For example, 10 euros may purchase 1,000 yen.

Though according to the current exchange rate 10 euros should purchase 1,000 yen, it may actually require 12 euros to get 1,000 yen. The extra two euros are likely to be a commission and fee. Such charges are often added to the exchange rate to provide profits for those who provide exchange services.

When one currency is pegged to another, there is a fixed exchange rate. If, for example, the yen was pegged to the euro, 1,000 yen would always be equivalent to 10 euros. However, most currencies are not pegged, meaning their value is constantly fluctuating. Exchange rates can move in favor or against any particular currency, which translates into profits and losses, depending on the currency a person has and when he exchanges it.

Consider the example above where a person exchanged euros for yen at a rate of 10 for 1,000. If the yen strengthens, that individual can take the 1,000 yen back to the point of exchange and it may purchase 15 euros. This happens when the exchange rates fluctuate in a manner that makes one currency more valuable than it previously was and another currency less valuable than it previously was.

Since the value of currency fluctuates this way, many people become FX traders. These individuals aim to use exchange rates to their advantage. Their goal is to purchase currencies and sell them for other currencies at times when profits can be made.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
By Melonlity — On Feb 27, 2014

What are some good ways to find the lowest commission rates? If, for example, someone travels to a foreign country, is there a way to find out what commission rates are standard and which companies charge around the rate, above it, offer a discount, etc.? That would be some great information for travelers.

Share
https://www.wise-geek.com/what-are-exchange-rates.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.