About Rate-Exchange.org

The rate at which one currency can be exchanged for another forms the basis for the modern foreign exchange markets. Occasionally, these rates 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.org offers a variety of tools to help you obtain and analyze these rates as part of your decision making process.

About Foreign Exchange Rates

What is Currency Trading

Learn more about what currency trading is, how it works, and the history of trading currency.

Articles: What is Currency Trading (5 Parts)

It’s all in the numbers

Exchange rates 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, 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.

Understanding foreign exchange rates

Foreign exchange rates are 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.

Breaking It Down

Foreign 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.

Quotable quotes

The global popularity of the U.S dollar means that this currency is frequently used to express a particular exchange rate. Direct quotations are made in terms of the home currency. For example, in a direct quotation in the , one Australian dollar (AUD) might be quoted as USD $1.3028. Indirect quotations are made in terms of the foreign currency. This is often referred to as the “cross rate” and is often used for non-U.S. dollar transactions. For example, one U.S. Dollar (USD) would be quoted at AUD .7676. Regardless of whether the quotation is direct or indirect, the figures are reciprocals – meaning that one can always be mathematically computed from the other. Cross-rate tables are one of the most popular means of reviewing these relationships, and you’re probably already accustomed to glancing at these tables online or in newspapers.

A Moment In Time

Most currencies traded on the Interbank market are floating-rate currencies, meaning that they are subject to the forces of supply and demand, and their exchange rates are determined primarily by the liquidity of the marketplace. While the values of some currencies are based or “pegged to” other currencies, the actual exchange rate for most currencies vacillates moment by moment. Unlike equity market prices which are frequently “time delayed” to avoid undue, outside influences, foreign exchange rates offer a real-time snapshot of available prices at one specific point in time. An interactive, software-based cross-rate table can help you to spot investment opportunities as they arise.

Spot vs. forward

The spot rate, sometimes referred to as the cash price, cash rate or today’s rate, is the exchange rate quoted for the closest standard settlement day. Spot rates typically have a two-day settlement period, though settlement can take place quicker than two banking days. The forward rate is the value of a currency at a point either 30, 60 or 90 days into the future, and reflect the exchange rate on the day of future settlement. Currency futures are forward rates pertaining to currency blocks of a set size.

As stated previously, individual investors typically do not have direct access to Interbank foreign exchange rates, as these figures are used primarily by institutional entities and require accreditation for access. In actual practice, individual traders will obtain rates from a commercial bank that participates in the foreign exchange marketplace. The quoted spread will be often be slightly larger than normal, allowing for the bank to make a commission on the trade. Some banks also assess per-transaction fees to recoup the cost of doing business, and investors should be fully aware of how an intermediary is being compensated before placing a trade. But regardless of what source is used, modern currency traders have a choice of sources for exchange rates.

Everywhere a sign

Commercial banks, brokerages and private enterprises engaged in foreign exchange often post prevailing rates at a prominent location within their offices, usually by means of an electronic sign board that is updated frequently via computer. These types of boards are frequently seen at airport exchange counters, investment advisory branch offices, and at American Express offices in major and foreign cities. These exchange rates may also be provided to customers and other interested parties on the Internet, and almost always include the broker’s commission for the transaction. After all, even the simplest form of foreign exchange can be a very profitable business, especially when the exchanger has a captive audience.

Old news is good news

Major daily newspapers such as The Wall Street Journal, The New York Times and The Financial Times of London publish exchange rate tables that reflect pricing information from the previous business day’s activity, often obtained under contract from a major financial news service such as Reuters, Bloomberg or Dow Jones Telerate. The main problem is, by the time these figures make it into print, they are already obsolete – and essentially constitute “old news.” Therefore, exchange rates published in newspapers and business periodicals are useful to the extent that they provide generalized guidance and historical trend information, but cannot be relied upon for accurately pricing new transactions.

The age of the Internet

Institutional and private investors are always interested in trend data, but they’re usually more interested in obtaining real-time rate quotations that can be used immediately. Prior to the modern age of desktop computers and the Internet, these rates were primarily quoted between parties either over the phone or by telex machine. In fact, currency traders still use the term “cable” in referring to British pounds, due to the fact that during the market’s early days, most US/UK trading was transacted by transatlantic undersea cable. While this antiquated system could be cumbersome at times, it sufficed for decades and successfully handled millions of individual transactions. As the sophistication and volume of trading increased, proprietary mainframe-based computer systems began to play a vital role in the complex task of matching buyers and sellers in the currency markets (also known as “market making”). Today, anyone with a desktop personal computer or laptop and a high-speed Internet connection can access a complete range of high-quality rate quotation services, and execute currency transactions from the comfort of their home or office.

What is Currency Trading

Learn more about what currency trading is, how it works, and the history of trading currency.

Articles: What is Currency Trading (5 Parts)

Saving Money when Exchanging money

Exchanging money? We provide additional information on how to save money when exchanging one currency for another currency.

Article: Reducing fees on Currency Exchanges

Information on Supported Currencies

Rate-Exchange extends our resource offering with structured and objective information about our 48 supported world currencies.

Articles: Currency Information (Euro)