Outline The rate of exchange can be explained as a price. It is the worth or price of an individual currency in exchange for another currency. It can be said that it is a comparative price of the two currencies. Like any other price, it is influenced by the forces of demand and supply. So, money can be explained as the media of exchange. In international trade, the value of one product or commodity is quoted in two or more currencies. It is the ratio of the one currency units needed to buy or to obtain from selling, the product in one region or country to the units of other currencies needed to obtain or purchase from selling, the analog’s commodity in the other nation or region. This is known as purchasing power parity or PPP which is a significant theory and benchmark of studies in international finance. This research essay attempts to throw more light on the different models of determination of the rate of exchange and also deliberate on the empirical studies on the subject in detail. Analysis Over the last 25 years, exchange–rate determination has magnetized a glut of empirical studies on the subject. Since the floating exchange rate system was reintroduced in the early 1970s, it is probably one of the most researched areas by eminent scholars. It is open true that exchange rates impact investments, the flow of goods, relative prices, and money between countries. Moreover, the flexible exchange–rate system has been introduced as a new element of transaction risk among individuals and nations in comparison to the fixed exchange–rate system. Hence, many empirical studies have been made to assess which model captures almost exactly the demeanor of exchange-rate fluctuations and, which is the best exchange-rate forecasting model. (Arize: 218) Models of Nominal Exchange Rate Determination It is crucial to determine the nominal exchange rate since it impacts real variables. According to Krugman (1993), “the proof on the real impacts of nominal exchange rate changes is, at first reading, irresistible for industrial nations, particularly since 1980, nominal exchange rates have been mirrored in nearly one-for-one changes in the relative prices of labor and goods. The $US is the most apparent model: from 1980 to 1985 as its trade-weighted nominal exchange rate jumped to a logarithmic forty-nine per cent, its real rate by forty-four per cent and then, from 1985 to 1990, the nominal rate declined forty-seven per cent, and the real rate declined forty-three percent. Thus, these nominal exchange rate changes seemed to have a very nearly one-for-one effect on real exchange rates.” A lot of deliberations have been made on the determination of exchange rate, but it is arduous to discover an ideal exemplar that is superior both in hypothesis and demonstrated empirically also. Krugman in his empirical study made in 1993 also concurred with the identical notion: “I believe that international monetary economists have discarded, at least for now, on the suggestion of seeking to formulate models of the exchange rate that are both theoretically interesting and empirically defensible. Quantitative policy analysts must have adequate proof to determine exchange rates in their empirical models, so they either have an exchange rate equation that roughly adapts to the data or si