In finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. This way of trading is different to the futures markets, for example, where the marks, francs and yen are the fixed trade currency, resulting in a US dollar denominated profit or loss.
Currency
The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned. If the exports of the country exceed imports the demand for the local currency in the exchange market will rise. Where the increase in value is beyond the support point the central bank of the country intervenes in the market to sell local currency and thus the foreign exchange reserves of the country increase. The sale of local currency in the market leads to increase in money supply in the country causing inflation.
Trade
Many countries maintain their currencies pegged through trade and exchange controls at a level higher than that would prevail in a free market. The introduction of flexible rate system would substantially deteriorate their terms of trade. The CME (Chicago Mercantile Exchange) offers trading in a wide variety of currency futures, but the reality is that low volume and open interest in many currency futures markets make them unsuitable for most traders.
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