Forex Exchange

By: EconomyWatch   Date: 28 July 2009

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Forex exchange rate is the value at which two different currencies relates to each other. In simpler words, the forex exchange rate defines the amount of a particular currency needed to buy another.

 

Why is Forex Exchange Rate Needed? 

The forex market deals in different currencies. Each trade is based on the analyzed increase or decrease in the value of that currency. The difference in the value of the currencies is the trader’s profits or losses.  

Forex exchange rates inform traders about the exact amount of money he/she needs to trade with. The forex exchange rate forms the basis of the forex market.  

Glossary Related With Forex Exchange

The forex market uses many different terms related to forex exchange rate to explain different financial developments.

To be a successful trader, it is crucial to understand these concepts clearly.

  • Pips: or basis points are two terms used to define the amount of change in the value of a currency against another. They are calculated up to four decimal points. For example: in a currency pair of EUR/JPY, if the existing rate is 133.8435  and it goes up to 133.8440, then there will be a positive 5 pip movement.

  • The forex market deals in two currencies, so the prices are always ‘two tier’ rates. This means that the forex exchange rate represents the bid as well as the ask price of one currency in terms of another. For example in a EUR/JPY pair, the forex exchange rate is written as 133.8440/133.8445, this means that one can sell(bid) one Euro for 133.8440 JPY or buy (ask) one Euro for 133.8445 JPY. Here the base currency is the EUR and the term currency is JPY.

 

How is Forex Exchange Rate Calculated?  

Many factors affect the forex exchange rate. These are:

  • International political and economical scenarios

  • Traders’ instincts

  • Market situation

However, the most crucial factor that creates the fluctuation in the forex exchange rate is the demand of a particular currency. Increased demand leads to more purchasing of the currency and thus, mortifies the value against other currencies.


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