Exchange rates represent the prices of different currencies at any given time. When exchange rates fluctuate, traders’ profits and losses will increase and decrease accordingly. Therefore, reading and understanding Foreign rates of Exchange is extremely important. In the article below. Join Learn Forex Trading to learn about exchange rates through the article!
What are Foreign Rates of Exchange?
Foreign rates of Exchange are commonly referred to as forex rates. Or foreign exchange rate or exchange rate. Let’s find out what foreign exchange rates are.
Foreign exchange rate concept
A foreign exchange rate is the price of one currency determined in terms of another currency. This exchange rate is often closely related to currency pairs. Specifically, you will buy one currency by selling another currency. For example: The EUR/USD exchange rate is 1.1404, meaning 1 Euro costs 1.1404 USD.
Normally for a currency pair, brokers will quote traders two buying prices (bid) and asking prices (ask). And benefit from the bid-ask difference, also known as the spread.
See more: Discover the “secret” about XAUUSD price
Types of Foreign Rates of Exchange
There are many ways to classify foreign exchange rates. The most popular are:
(1) Divided by foreign exchange transactions at banks, we have:
- Buying price: This is the price the bank wants to buy foreign currency from the customer. Also known as the exchange rate for converting foreign currency to domestic currency, that is, how much domestic currency is needed to own a certain amount of foreign currency.
- Selling price: The price the bank wants to sell foreign currency to customers. This exchange rate represents the amount of domestic currency the bank needs to earn when selling a certain amount of foreign currency.
- Average price: The average price between the buying price and the selling price. This exchange rate is often used in economic analysis reports or magazines.
(2) Based on transaction time:
- Spot exchange rate: is the exchange rate corresponding to foreign currency transactions right at the time of exchange or transaction.
- Pending exchange rate: is the exchange rate agreed between the buyer and the seller, to be implemented at a future time. When the transaction date arrives, the two parties will use this exchange rate to exchange the agreed amount.
(3) Based on placement:
- Base exchange rate: has the presence of a popular currency in international transactions, accepted globally. This currency has a large proportion of the total volume of foreign exchange reserves. From there, compare it with the local currency to create an exchange rate.
- Cross rate: It is the rate of local currency/foreign currency calculated based on the base rate.
Concepts related to foreign exchange rates
To read Forex currency pairs exchange rates accurately, you need to understand some key concepts below.
ISO hand
This is a code published by the ISO organization according to international standards. ISO codes are applied to currencies around the world. Each coin will have a 3-letter code. For example, the US dollar is written as USD, the Euro is denoted as EUR.
Base/quotation currency
The base currency is the base currency with a fixed unit of 1. The quote currency is also known as the currency whose units change according to the supply and demand situation of the market. In the forex market, Foreign rates of Exchange are often used as USD exchange rates or GBP exchange rates compared to local currencies.
Buying price (ask) – Selling price (bid)
In forex trading, a currency pair will be quoted two prices, the buy price (ask) and the sell price (bid). The term ask/bid is understood from the broker’s perspective. Specifically, the ask (buy) price is the price at which traders can buy, also known as the asking price of the broker. The bid price is the price at which the trader can sell, also known as the broker’s bid price.
Of course, traders always look for opportunities to buy low and sell high. Or they will sell when they think the market will decrease, sell off to buy back at a lower price later.
Bid-ask difference (spread)
A currency will usually have a higher buying price than a selling price. The difference between the buying price (ask) and the selling price (bid) is called the spread. Brokers in the forex market make money mainly from this price difference. Spreads on major currency pairs tend to be low due to high trading volume and high liquidity.
Forex exchange rates of major currency pairs
Major currency pairs are made up of popular currencies, with the USD always present. Specifically, there are 7 main currency pairs: EUR/USD – USD/JPY – GBP/USD – USD/CHF – NZD/USD – USD/CAD – AUD/USD.
How to determine forex exchange rates of major pairs
Foreign rates of Exchange mainly include two types: buying price (bid price) or selling price (ask price). The price of the major currency pair is determined by the weakness or strength of the base currency relative to the cross currency. The base currency value is always 1.
See more: Registering Exness broker account on your phone
Forex exchange rates cross currency pairs
A cross-currency pair is a currency pair that does not contain the USD. The Euro and the Japanese yen are the two most popular and widely used currencies in cross-currency pairs. For example: EUR/CHF, GBP/JPY, GBP/ EUR, EUR /JPY,…
What is the way to calculate cross-exchange rates?
A cross-exchange rate is an exchange rate between two currencies determined by a base currency. The calculation method depends on whether the currency is quoted indirectly or directly. Specifically, there are 3 ways to calculate cross-border Foreign rates of Exchange :
(1) Exchange rate between 2 quote currencies:
List price/valuation = (List price/USD) divided by (Valuation/USD)
(2) Exchange rate between 2 base currencies:
List price/valuation = (USD/valuation) divided by (USD/list price)
(3) Exchange rate between base currency and quote currency
List price/valuation = (List price/USD) divided (USD/valuation)
Tips for reading Foreign Rates of Exchange
- Ask price (offer to sell) and bid price (offer to buy) are two prices determined from the broker’s perspective. Traders will buy at the ask price and sell at the bid price.
- The base (base) currency is the currency that appears first in the pair, while the quote (variable) currency is the second currency.
- Currency pairs that do not contain JPY (Japanese yen) have changes as small as 1 pip. Specifically, change the digit at the 4th decimal place). For currency pairs with JPY, the smallest change will be in the 2nd decimal place.
- Spread difference is the first loss that traders see most clearly in a transaction.
Epilogue
Above, Learn Forex Trading has provided you with the basic information you need to know about Foreign rates of Exchange. Hope this knowledge is useful when you start participating in the forex market. From there, you know what price you will buy and sell, what are the main currency pairs, and cross-currency pairs and how their exchange rates are determined.
FAQ
Foreign rates of Exchange?
Foreign rates of Exchange are the price of one currency calculated based on the price of another currency. Also known as the forex rate or exchange rate.
What is the cross rate?
A cross-exchange rate is an exchange rate between two currencies determined by a base currency. Cross rates are the rates of cross-currency pairs, i.e. currency pairs that do not contain the USD.
Why do foreign exchange rates change?
Foreign exchange rates change due to fluctuations in the economy, politics, and other factors that affect the value of currencies.
