Currency Exchange Rates

See Also:
Currency Swap
Transaction Exposure
Hot Money
Exchange Traded Funds
Required Rate of Return
Hedge Funds
Fiat Money

Currency Exchange Rates

An exchange rate gives the value of one currency in terms of another. An exchange rate can be computed for any two currencies. Exchange rates are typically quoted to at least four decimal places.

Foreign currencies are exchanged for investment and speculative purposes and for hedging risk. Foreign currencies are traded all over the world twenty-four hours a day via banks and brokerages. The foreign exchange market is the largest market in the world. Speculating in foreign exchange markets is considered very risky.

Fixed Exchange Rates vs. Floating Exchange Rates

An exchange rate can be fixed or floating. A fixed rate is determined and maintained by government central banks. A floating rate is determined by market forces.

A fixed rate, or peg, maintains a set exchange rate for one currency in terms of another. For example, assume the Chinese Yuan is pegged to the US Dollar. If the US Dollar declines in value, then the Chinese Yuan will also decline in value so that the exchange rate remains unchanged.

A floating rate allows the exchange rate between two currencies to fluctuate freely based on the supply and demand of each currency, as well as other relevant economic factors. For example, the exchange rate between the US Dollar and the Euro is a floating rate. Due to market forces, the exchange rate between these two currencies fluctuates continuously.

Currency Spot Prices

The spot exchange rate for two currencies is the rate of exchange for immediate (within two business days) delivery. For example, if a trader wants to exchange US Dollars for Euros today, he would do so at the spot rate.

Currency Forward Rate

The forward exchange rate for two currencies is the rate of exchange for future delivery. Forward rates are often quoted for 1-month, 3-month, and 6-month contracts. If a trader plans to exchange US Dollars for Euros three months from now, but wants to fix the price of the conversion today, he can do so by purchasing Euros at the 3-month forward rate. In three months the trader would receive the amount of Euros determined by the forward rate contract, regardless of the spot rate at that time.

Appreciation and Depreciation of Currency

Appreciation, or revaluation, refers to an increase in the spot rate value of one currency in relation to another.

Depreciation, or devaluation, refers to a decrease in the spot rate value of one currency in relation to another.

Direct Quote vs. Indirect Quote

A direct quote shows the home currency price of one unit of foreign currency. An indirect quote shows the foreign currency price of one unit of home currency. For example, consider these hypothetical direct and indirect quotes between the Euro and the US Dollar, using the US Dollar as the home currency:

Direct Quote:        $1.5501 = €1        (1/.6451)

Indirect Quote:      €.6451 = $1         (1/1.5501)

FOREX Rates (FX Rates)

Currency exchange rates are also called forex rates or fx rates.

Exchange Rate Converter

For foreign currency conversions, go to: www.oanda.com

Exchange Rates – Historical

For historic exchange rate data, go to: www.oanda.com

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