In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. This way of trading is different to the futures markets, for example, where the marks, francs and yen are the fixed trade currency, resulting in a US dollar denominated profit or loss.
Currency
The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned. If the exports of the country exceed imports the demand for the local currency in the exchange market will rise. Where the increase in value is beyond the support point the central bank of the country intervenes in the market to sell local currency and thus the foreign exchange reserves of the country increase. The sale of local currency in the market leads to increase in money supply in the country causing inflation.
Exporters and importers know in advance how much they will receive or they will have to pay in terms of home currency. Lenders on long term would be prompted to invest in other countries only when the return in terms of home currency is ensured by stable exchange rates.
The British Pound is the currency of the United Kingdom as well as a major currency traded worldwide by corporations, institutions, banks, commodity funds, and futures traders. The Swiss Franc one of the world's strongest currencies and enjoys a reputation as a safe haven currency.
Trade
Many countries maintain their currencies pegged through trade and exchange controls at a level higher than that would prevail in a free market. The introduction of flexible rate system would substantially deteriorate their terms of trade. The CME (Chicago Mercantile Exchange) offers trading in a wide variety of currency futures, but the reality is that low volume and open interest in many currency futures markets make them unsuitable for most traders. Today, the CME (Chicago Mercantile Exchange) is the largest market for
exchange-traded currency futures in the world and is considered the world's premier exchange for the trading of currency futures and options. The Advantages of Trading Currency Futures Currency futures trade nearly 24 hours - Traders looking to profit from market movements can act any time of the day or night during the trading week to take advantage of changing market conditions.
Exchange
The conversion of currencies is done by banks who deal in foreign exchange. The rate of exchange for a currency is known from the quotation in the foreign exchange market. The banks operating at a financial centre and dealing in foreign exchange, the rates in the foreign exchange market . As in any commodity or stock market the rates in the foreign exchange market are determined by the interaction of the forces of demand for and supply of the commodity dealt in foreign exchange.
Fixed exchange rates refer to the system under the gold standard where the rate of exchange tends to stabilize around the mint par value. Any large variation of the rate of exchange from the mint par value would entail flow of gold into or from the country. The present day situation where gold standard no longer exists, fixed rates of exchange refer to maintenance of external value of the currency at a predetermined level. Whenever the exchange rate differs from this level it is corrected through official intervention.
Conclusion
Customers can now trade currency from home, office, laptop on the go or even from an internet caf. Trading involves risk and is not suitable for all investors. The exchange rate between currencies in currencies in a foreign exchange market is affected by a number of factors. The rates are free to fluctuate according to the changes in demand and supply forces with no restrictions on buying and selling of foreign currencies in the exchange market. The rapid price changes associated with Currency Futures create practically continuous trading opportunities. Luckily, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend.
