The correct answer is Option (2) → Floating Exchange Rate.
Floating exchange rate is determined entirely by the market forces of demand and supply without direct government or central bank intervention.
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Fixed Exchange Rate: This is an exchange rate regime where a country's government or central bank ties the official exchange rate to another country's currency or the price of a commodity (like gold). It is not determined by market forces alone.
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Managed Floating Exchange Rate: This is a hybrid system where the exchange rate is generally allowed to float according to market forces, but the central bank intervenes periodically to influence the rate, preventing excessive fluctuations. It's not solely determined by demand and supply.
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Foreign Exchange Rate: This is a general term for the rate at which one currency can be exchanged for another. It doesn't specify the mechanism of its determination.
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