Exchange rates is also know as as foreign exchange rates or forex currency rates or FX rates between two currencies. These exchange rates indicate the worth of one currency in terms of the other. It is basically the value of a foreign country’s currency in terms of the home country’s currency.
To quote an example, forex currency rate of Indian Rupees (INR) 45 to U S dollars means that INR 45 is worth one U S dollar. The Forex market is the largest financial market in the world both in terms of size and transactions. Approximately 3.2 trillion USD worth of forex currency is traded each day in this market.
Forex currency rates are quoted by stating the number of units of “term currency” or “price currency” or “quote currency” that can be bought in terms of 1 “unit currency” which is also known as the “base currency”. To quote an example, in a quotation that says the EUR/USD exchange rate is 1.4320 (1.4320 USD per EUR), the term currency is USD and the base currency is EUR.
Forex currency rates can either be spot rate or forward rate. Spot exchange rate as the name suggests is the current exchange rate. Forward exchange rate is the exchange rate quoted and traded today with the delivery and payment for forward transactions happening on a specific future date.
Forex currency rates are quoted either directly or indirectly. Quote in which country’s home currency is the price currency refers to Direct quotation. For example EUR 0.63 = USD 1.00 in the Euro Zone is known as direct quotation or price quotation and is used by most countries.
Quotes which use a country’s home currency as the unit currency are known as indirect quotes. For example EUR 1.00 = USD 1.58 in the Euro Zone indicates Indirect quotation or Quantity quotation. This type of quotation is popularly used in U K newspapers and is also common in Australia, New Zealand and the Euro Zone.
In summary:
- direct quotation: 1 foreign currency unit = x home currency units
- indirect quotation: 1 home currency unit = x foreign currency units
While using direct quotation you will note that as the home currency strengthens the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases which implies a depreciating home currency.
Forex market trading is no longer the domain of large institutions alone. Ordinary people like you and me can easily learn the basics and start trading profitably in the market.
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