floating exchange rate(redirected from Freely Floating Exchange Rate)
Floating exchange rate
Floating Exchange Rate
The exchange rate in which the value of the currency is determined by the free market. That is, a currency has a floating exchange rate when its value changes constantly depending on the supply and demand for that currency, as well as the amount of the currency held in foreign reserves. An advantage to a floating exchange rate is that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile depending on the particular currency. A currency with a floating exchange rate may undergo currency appreciation or currency depreciation, depending on market fluctuations. A floating exchange rate is also called a flexible exchange rate. See also: Fixed exchange rate, Crawling peg, Managed float.
floating exchange rate
An exchange rate between two currencies that is allowed to fluctuate with the market forces of supply and demand. Floating exchange rates tend to result in uncertainty as to the future rate at which currencies will exchange. This uncertainty is responsible for the increased popularity of forward, futures, and option contracts on foreign currencies. Also called flexible exchange rate. Compare fixed exchange rate.