Added: 02/13/2006 |
What is currency exchange rate?The currency exchange rate at which one currency can be exchanged for another forms the basis for the modern foreign exchange markets. Occasionally, these currency exchange rate are fixed values that can be relied upon not to change over periods of time. But more often, exchange rates represent constantly fluctuating ratios, influenced by factors such as supply, demand, interests rates, economic conditions, political matters and other international events. Like other forms of speculative investing, the ability to successfully predict changes in exchange rates can yield impressive returns for the shrewd trader. Rate-exchange organizations offer a variety of tools to help you obtain and analyze these rates as part of your decision making process.
Currency Exchang rate form the basis of the modern currency trading marketplace. Due to the fact that this global industry has thousands of participants and lacks a centralized clearinghouse for quote information, currency exchange rates are constantly in flux, and no two sources will quote the exact same rate for a particular transaction. Even though the major foreign exchange centers of the world are separated by thousands of miles, huge oceans, numerous time zones and substantial language barriers, certain conventions have developed over the years which allow buyers and sellers to communicate deal terms quickly, accurately and efficiently. A thorough understanding of the different types of exchange rates is essential to becoming a successful participant in this dynamic market, and will help you develop an appreciation of the various tools that are available to aid in your decision making.
Currency exchange rate is quoted in several different manners using standardized nomenclature to expedite communications and reduce misunderstandings. Exchange rates quoted on the Interbank market are akin to wholesale prices, and are available only to institutional investors that deal in large volumes of currency. Exchange rates quoted to individual investors are akin to retail prices, due to the fact that individual transaction amounts generally tend to be smaller, and the rates often include the broker's commission, often expressed in terms of pips, ticks or basis points.
There are always two prices involved in foreign currency transactions: one at which sellers want to sell; and one at which buyers want to buy.
Currency exchange rates are always quoted in decimal points which are smaller than the actual smallest currency denomination. The reason being that rounding errors in exchange rates can be sizeable when dealing with transactions in millions of units. For example, U.S. dollars are quoted to the thousandth of a cent, or 1/10,000th of the primary currency unit, and is referred to as a ?pip?. Japanese Yen and Italian Lira have units of such small absolute value, that their quotes are carried to two decimal units, in which case the pip is only 1/100th of the primary currency unit. In any case, a pip (sometimes referred to as "basis points" or "ticks") is always the smallest amount at which the currency?s price can change
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