What are the main factors that determine exchange rates? Why are exchange rates so volatile? Solution Exchange rate is the rate of currency of a country in terms of other. Factors determining exchange rate are: Exchange rate are very sensitive to the factors mentioned above. A small change in any of the above factor in any country will result in change in currency value of a country in terms of other country. Hence exchange rate keeps fluctuationg accordingto the performance of an economy on daily basis..