An exchange rate is the price’s rate at which one countrys currency trades for another on the foreign exchange market. This rate differs from country to country and it is depends on many economical variables, the main of which are the general balance and imbalance of economy, monetary and fiscal policy, the state of the budget, international policy, the condition and development of the country’s economy compared to the world situation and dominating countries, purchasing power of the currency, and other internal and external factors.

Based on the internet that we found on internet, the history of world exchange rate systems shows us that the world community which in its majority has in fact shifted from the system of fixed exchange rates to floating exchange rate system. According to the information, there exist different combinations of floating and fixed exchange rate systems currently, together with specific economical instruments, these systems were created for exchange rate regulating. There are 2 extreme regimes of exchange rates which are floating exchange rate and fixed foreign exchange rate.

The fixed exchange rate system is the system in which the value of a countryHYPERLINK “http://www.businessdictionary.com/definition/country.html”‘HYPERLINK “http://www.businessdictionary.com/definition/country.html”s currency, in relation to the value of other currencies, is maintained at a fixed conversion rate through government intervention. Fixed exchange rate is opposite of floating exchange rate.

Government used the fixed exchange rate system to fix the exchange rate and this system is included two exchange rates, which are fixed and unconvertible exchange rate and fixed and convertible exchange rate.

The value of the currencies for the flexible exchange rate system are free to change in relation to one another according to market demand and supply for each currency .The flexible system are widely used in many countries of the world. Some common examples of the flexible exchange rates would be the British pound, United States dollar, Japanese Yen and Euro. The main factors affecting the flexible exchange system are trade flows and capital flows. The government and or monetary authorities can adjust the interest rates for domestic economic purposes rather than to achieve a given exchange rate target. Other than that, undergo shows that flexible exchange rates are more resilient in the face of shocks, and are better able to distribute the burden of adjustment between the external sector and the domestic economy.