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There are three basic types of exchange regimes: floating exchange, fixed exchange, and pegged float exchange.

The exchange rate gives the relative value of one currency against another currency. An exchange rate GBP/USD of two, for example, indicates that one pound will buy two U.S. dollars. The U.S. dollar is the most commonly used reference currency, which means other currencies are usually quoted against the U.S. dollar.

Many methods of forecasting currency exchange rates exist. Here, we'll look at a few of the most popular methods: purchasing power parity, relative economic strength, and econometric models.

In order to forecast future movements in exchange rates using past market data, traders need to look for patterns and signals. Previous price movements cause patterns to emerge, which technical analysts try to identify and, if correct, should signal where the exchange rate is headed next.

Suppose that the EUR/USD exchange rate is 1.20 and you'd like to convert $100 U.S. dollars into euros. Simply divide the $100 by 1.20. The result is the number of euros: 83.33. Converting euros to U.S. dollars means reversing that process: multiply the number of euros by 1.20 to get the number of U.S. dollars.

Many methods of forecasting currency exchange rates exist. Here, we'll look at a few of the most popular methods: purchasing power parity, relative economic strength, and econometric models.

Theories of exchange rate determination. At the most basic level, exchange rates are determined by demand and supply of one currency relative to the demand and supply of another. However differences in relative demand and supply explain the determination of exchange rates, they do it only in a superficial sense.