<h3>Free Floating</h3>

Definition: Free Floating refers to a system or arrangement wherein a particular currency’s exchange rate is allowed to fluctuate freely in response to market forces, without any government interference or control.

In a free floating exchange rate regime, the value of a currency is determined solely by the supply and demand dynamics in the foreign exchange market. The exchange rate can therefore vary continuously, reflecting changes in economic factors such as inflation, interest rates, trade balance, and capital flows.

Unlike a fixed exchange rate system, where the central bank or government may intervene to stabilize the currency’s value, a free floating system relies on market mechanisms to adjust the exchange rate. This can lead to greater volatility in currency values but also provides opportunities for market participants to take advantage of fluctuations in exchange rates for various purposes, such as hedging or speculative trading.

Free floating exchange rates are considered flexible and are commonly adopted by many countries around the world. They offer advantages such as allowing for automatic adjustments in response to economic conditions and greater transparency in international trade. However, they can also pose challenges for policymakers in managing economic stability and competitiveness.