Exchange rates

Foreign exchange rates, or exchange rates, or forex rates, or currency quotations. I think you have heard this phrase on TV or radio many times.

In a nutshell, the exchange rate is the price of a currency of one country expressed in monetary units of another country. A rate is expressed in a pair of currencies which are involved in a sale and purchase transaction. For example, the pair EUR / USD (symbol EURUSD is often used) indicates how many US dollars is “contained” in 1 euro. The first currency in the pair (in this example, the euro) is called base currency and is counted as a unit. The second is called quote (counter) currency and it expresses the value of the base currency.

There are a lot of currency pairs, the main ones are EURUSD, GBPUSD, USDCHF, and USDJPY.
They are most commonly used in the trade. A little less popular are AUDUSD, USDCAD, and GBPJPY.

All currency pairs where US dollar is used refer to the spot rates. They can be divided into pairs with direct quote and with indirect quote. In the first case, the dollar serves as the quote currency: EURUSD, GBPUSD, AUDUSD. In the second case, it acts as the base currency: USDCHF, USDJPY, USDCAD. Currency pairs where the US dollar is not present are called cross rates. For example, GBPJPY, EURCHF, CADJPY. In fact, the cross-rate is a ratio between any two currencies that is derived from their rate in relation to the third currency which role is most often played by the US dollar (where should we be without it?). To calculate some cross rates a multiplication operation should be used, and a division operation to calculate others. If to look closely, it all comes down to operations with fractions, we have studied them at school. For example:

EURJPY = EURUSD x USDJPY (in the form of fractions as: EUR / JPY = EUR / USD x USD / JPY)

GBPCHF = GBPUSD x USDCHF Now GBPUSD = 1.5713, USDCHF = 0.95. Consequently,

GBPCHF = 1.5713 x 0.95 = 1.4927


EURGBP = EURUSD / GBPUSD (in the form of fractions: EUR / GBP = EUR / USD / GBP / USD = EUR / USD x USD / GBP)

If EURUSD = 1.2638 and GBPUSD = 1.5713, EURGBP = 1.2638 / 1.5713 = 0.8043

Exchange rate fluctuations occur constantly, but for a layman, they are imperceptible. In any bank or exchange office, exchange rate of a currency often has two decimal places. For example, the US dollar relative to Ukrainian hryvnia is 8.05. In the Forex market, the accuracy is much higher and the exchange rate has four decimal places. The exception is pairs with the Japanese yen where accuracy is two digits. The reason for this is low cost of the Japanese currency against the US dollar. You can make money in the currency market even at the most minor changes to the rate. I will tell how it works and how to calculate profit in the article “Calculation of profitability”.

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