foreign exchange rates - aka forex rates – are the
values of two currencies relative to each other.
in other words, how much of one currency needed to buy a
unit of the other currency. for ease of use, the forex normally expresses this
relationship as the amount of one currency required to buy one us dollar. the
shorthand for this is a pairing; usd/jpy at 110.00 means one us dollar buys
110 japanese yen.
sometimes the pairing of currencies is reversed, with the
rate expressing the us dollar equivalent of one unit of foreign currency. in
addition, you will also see currency pairings between foreign currencies and
these values are known as “cross rates”. in cross rates, where the us
dollar does not figure, the value is the relative value between the two
currencies. the pairing, eur/jpy at 135.10 signifies that one euro can be
exchanged for 135.10 japanese yen.
forex rates, unlike the simplified examples above, are
usually denoted to four decimal points, which are referred to as pips or basis
points. if euros were used to buy yen at 135.1030 and then the euro exchange
rate went up to 135.1035, this would be a five pip improvement on the rate.
like trading in other markets, the forex operates on a
bid/ask price basis. the twin nature of foreign exchange transactions means
that forex rates are quoted as ‘two tier’ rates, e.g. usd/jpy at 110.00/10
indicates a trader prepared to buy yen at 110 and sell at 110.10. if this
trade is made, the trader will then have secured a 10 pip “spread”, the
difference between the buying and selling price.
the spread between currencies depends on market
conditions and how traders around the globe believe each currency is set to
perform and its likely volatility.
officially quoted forex rates, though, are generally only
available to licensed forex traders. most small investors or day traders will
acquire their currency from a commercial bank but at a less favorable rate.
finding the best rates, and hence improving the chances of making a profitable
trade, is therefore crucial in the forex marketplace.
due to its global nature, the forex market – as opposed
to the forex players per se – is unregulated. neither the fed, the