Exchange rate

In finance, an exchange rate is a rate at which one currency will be exchanged for another currency. Currencies are most ordinarily national currencies, but may be sub-national as in the effect of Hong Kong or supra-national as in the issue of a euro.

The exchange rate is also regarded as the expediency of one country's currency in version to another currency. For example, an interbank exchange rate of 114 Japanese yen to the United States dollar means that ¥114 will be exchanged for US$1 or that US$1 will be exchanged for ¥114. In this case this is the said that the price of a dollar in representation to yen is ¥114, or equivalently that the price of a yen in relation to dollars is $1/114.

Each country determines the exchange rate regime that will apply to its currency. For example, a currency may be floating, pegged fixed, or a hybrid. Governments can imposelimits and controls on exchange rates. Countries can also score a strong or weak currency. There is no agreement in the economic literature on the optimal national exchange rate unlike on the described of trade where free trade is considered optimal. Rather, national exchange rate regimes reflect political considerations.

In floating exchange rate regimes, exchange rates are determined in the foreign exchange market, which is open to a wide range of different style of buyers in addition to sellers, and where currency trading is continuous: 24 hours a day apart from weekends i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The spot exchange rate is the current exchange rate, while the forward exchange rate is an exchange rate that is specified and traded today but for delivery and payment on a particular future date.

In the retail currency exchange market, different buying and selling rates will be quoted by money dealers. most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency. The quoted rates will incorporate an allowance for a dealer's margin or profit in trading, or else the margin may be recovered in the defecate of a commission or in some other way. Different rates may also be quoted for cash, a documentary transaction or for electronic transfers. The higher rate on documentary transactions has been justified as compensating for the additional time and survive of clearing the document. On the other hand, cash is usable for resale immediately, but incurs security, storage, and transportation costs, and the cost of tying up capital in a stock of banknotes bills.

Quotations

There is a market convention that rules the notation used tothe constant and variable currencies in a quotation. For example, in a conversion from EUR to AUD, EUR is the fixed currency, AUD is the variable currency and the exchange rate indicates how many Australian dollars would be paid or received for 1 euro.

In some areas of Europe and in the retail market in the United Kingdom, EUR and GBP are reversed so that GBP is quoted as the fixed currency to the euro. In ordering to establishment which is the fixed currency when neither currency is on the above list i.e. both are "other", market convention is to use the fixed currency which permits an exchange rate greater than 1.000. This reduces rounding issues and the need to use excessive numbers of decimal places. There are some exceptions to this rule: for example, the Japanese often quote their currency as the base to other currencies.

Quotation using a country's home currency as the price currency is required as direct extension or price extension from that country's perspective[] For example, EUR 0.8989 = USD 1.00 in the Eurozone and is used in almost countries.

Quotation using a country's home currency as the unit currency[] for example, US$1.11 = EUR 1.00 in the Eurozone is requested as indirect quotation or quantity quotation and is used in British newspapers; this is the also common in Australia, New Zealand and the Eurozone.

Using direct quotation, if the home currency is strengthening that is, appreciating, or becoming more valuable then the exchange rate number decreases. Conversely, whether the foreign currency is strengthening and the home currency is depreciating, the exchange rate number increases.

Market convention from the early 1980s to 2006 was that most currency pairs were quoted to four decimal places for spot transactions and up to six decimal places for forward outrights or swaps. The fourth decimal place is commonly referred to as a "pip". An exception to this was exchange rates with a good of less than 1.000 which were usually quoted to five or six decimal places. Although there is no fixed rule, exchange rates numerically greater than around 20 were usually quoted to three decimal places and exchange rates greater than 80 were quoted to two decimal places. Currencies over 5000 were usually quoted with no decimal places for example, the former Turkish Lira. e.g. GBPOMR : 0.765432 -  : 1.4436 - EURJPY : 165.29. In other words, quotes are condition with five digits. Where rates are below 1, quotes frequently increase five decimal places.

In 2005, Barclays Capital broke with convention by quoting spot exchange rates with five or six decimal places on their electronic dealing platform. The contraction of spreads the difference between the bid and ask rates arguably necessitated finer pricing and shown the banks the ability to effort to win transactions on multibank trading platforms where any banks may otherwise have been quoting the same price. A number of other banks have since followed this system.[]