How Currency Exchange Rates Are Determined In Markets

Currency exchange is an activity which allows the conversion one currency into another. Currency exchange may be a standalone business for an entity or may be a part of the offered services of that entity; like bank or other financial institution.  It is otherwise deemed as the value of one currency with respect to another currency.

Financial institutions generally fix the currency exchange rates close to the spot rates, keeping some profit margin. The selling or buying of the currency is not performed at the spot rate and depend on the profit margin that the exchange intends to make. We know that exchanging currency can be somewhat trouble prone. Most of times, dealing with currency can be complicated issue especially while you are in a rush travel or in abroad.

How Currency Exchange Rates Are Determined:

Currency Exchange rates are determined based on the normal Demand and Supply relationships like other commodities. Demand and Supply depend on many factors like import and exports of commodities, foreign investments, political stability, inflationary conditions any many other related factors. If Demand is more than Supply of a currency, it’s rate will go high and vice-versa. Currency Exchange rates are likely to change everyday based on supply and quoted regularly on financial markets, mainly by banks, around the world.

There are numerous unfamiliar terms and phrases associated with the currency exchange process. Here, we tried to help our visitors to make them understand the things and terms as simple as possible by setting a guide to currency exchange rates which will help to eliminate your confusion about it, ensure the best value of your money and to lessen worry about the next time you go abroad.

Terminology Used in Currency Exchange:

Selling rate – the rate at which you sell your foreign currency (which you have with you) in exchange for local currency (currency in present country). For instance, if you are in Australia, you would exchange your currency (For example, Euro) for Australian dollars, the rate.

Purchase/Buying rate – the rate at which you buy foreign currency from travelers to exchange into local currency. For example, if you were returning from Australia, we would exchange your Australian dollars back into Euros at the buying rate.

Tourist rate / Holiday money rate – the rate which is specially offered for tourists only or subjected to holidays

Spot rate – This is formally known as the inter-bank rate at which banks or large financial institutions make their transactions of large amounts of foreign currency. No one can purchase at this rate as he is buying relatively small amounts of foreign currency. This rate is broadcasted every business day in financial newspapers.

Forward Rate –  the rate at which buyers or sellers agree to purchase or sell currency at some future dates.

Cross rate – the rate at which one foreign currency is sold for another foreign currency (not local currency). For example, if you want to exchange Australian dollars into Saudi Riyals.

Spread – the difference between the buying rates and selling rates offered by foreign currency exchange dealers.

Commission – the fee that foreign-exchange dealers charge for exchanging one currency to another currency.

Now, we think you are done on the terms and phrases associated with Currency Exchange rates. Good luck!

Read More: Exchange Rate Mechanism and European Currency Unit

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