Introduction Foreign trade involves the use of different currencies & thus for the efficient use of such currencies, a clear conception about rate of exchange is essential. According to finance, the foreign exchange rate is the price of one currency in terms of another currency. It is determined in the foreign exchange market, which is the market where different currencies are traded. For example, if the Japanese rate of exchange is 102 Japanese yen in relation to USA $, it indicates that JPY 102 values equal to US $1. Exchange rate is of several types. Like- spot, forward or future exchange rates etc. Exchange rate determination Mcconnel, C. R., Brue, S. L. (2005) stated that like most other prices, FER varies from week to week & month to month according to the forces of supply & demand & foreign currencies are traded at the retail level in many banks & firms specializing in that business. This condition can be focused by the following diagram: Graph: Determining exchange rate Classification of models of exchange rate According to most petitioners, maximum RE models are based on abstract & long-term equilibrium conditioned. In case of equilibrium exchange rate model, the rate is imposed by presumed equity of the model. Or, diversified assumptions & conditions produce diversified equilibrium & exchange rate for the equal economy. Several related issues are: Purchasing-power parity The PPP is the one of the oldest methodology of assuming about rate of equilibrium exchanges. In the short-run, market-determined exchange rates are highly volatile in response to money policy, political events & changes in expectations. So, under this concept, a nation’s exchange rate will tend to equalize the cost of buying traded goods at home with the cost of buying those goods in abroad. Mcconnel, C. R., Brue, S. L. (2005) expressed that the PPP doctrine also holds that countries with high inflation rates will tend to have depreciating currencies. For example- if country A’s inflation rate is 10% while inflation in country B is 2%, the currency of country A will tend to depreciate relative to that of country B by difference in inflation rate or 8% annually. There are so many reasons for the backward nesses of PPP theory. Like:   * Introduction of non-tradable objects.   * Transportation.   * Trade restrictions & barriers.   * Differences in prices & customer preferences. A popular version of PPP is known as “Relative purchasing power parity” that emphasizes on variation in prices & thus in exchange rates. It more closely related to the macroeconomics concept or models, like- monetary models & inflation theory. Nominal & REER Another concrete approach is nominal or real effective exchange rates that prepare to implement the equilibrium values:   * “Real exchange or nominal exchange rate” is combined by the ratio of national to overseas prices or the interest by which a nation can purchase domestically relative to that it can purchase in foreign currency, while it is renewal into own country’s currency.   * According to “EER or Effective interest rate”, the overall or international foreign exchange value of a currency is estimated by a specific index & the weights of such indices are come from a nation’s global pattern of trade that can be termed as “trade weighted” index.   *