An exchange rate is the cost of exchanging one currency for another. Forex is about currencies and how they are exchanged. Constant fluctuations in exchange rates can affect the market. The forex market works in the same way as stocks and gold, with price fluctuations that can be both positive or negative. The bank and forex markets are two different functions. People who have been involved in forex for a while will be familiar with how exchange rates work. Here’s a quick guide on how exchange rates work and what to do if you’re just starting out.
Market Exchange Rates
Forex traders can buy and sell currencies 24X7. Exchanging currencies is essential for a trade to take place. Exchange of currencies is necessary for a trade to take place. To buy USD, one would need to exchange the currency for another. A currency pair is the currency to be bought and the currency to be given. If a trader bought USD in exchange to EUR, the currency pair would look like this: EUR/USD. In this example, the exchange rate would be EUR/USD. Just by searching for the currency, you can find the current rates. You will find many websites that provide currency rates information in the search results.
Study of Exchange Rates
An example will help you understand the importance of studying exchange rates. Let’s say that the EUR/USD rate is 1.0450. This means that 1 EUR costs 1.0450 USD. The currency (EUR), which is listed on the first currency pair, represents one unit of a particular currency. The exchange rate is the amount of the second currency (USD), needed to purchase one unit of the first currency (EUR).
You can also calculate the currency value (EUR) required to purchase one USD (secondary currency). Here is the mathematical formula that can be used:
F.C. value Value of F.C.
In this example, it would be 1/1.0450 = 0.9569. This is 0.9569 EUR needed to buy 1 USD. It can also be represented as:
The exchange rate for the reversed currency pair USD/EUR = 0.9569
Exchange Spreads
If you are considering the bank as a place to hold currencies, it is unlikely that you will get the market price. Banks and currency conversion houses/associations make more profit than the market. This is why the exchange rate offered at the bank is usually higher than the market.
The above example will also be considered. The bank may charge 1.07 if the EUR/USD exchange rate in the market is 1.0450. This is more than fair. The percentage difference between the market price and the bank price can be easily calculated.
Difference in % = [Bank Exchange Rate-Market Exchange Rate]/Market Exchange Rate] X 100
i.e. Percentage difference (EUR/USD = [1.07-1.0450]/1.0450]x 100 = [0.025/1.0450]x 100 = 2.39%
The percentage difference between the USD/EUR reverse currency pair can also be calculated in a similar way. Let’s say that the bank provides a 0.9829% exchange rate.
Apply the same formula as above:
i.e. Percentage difference (USD/EUR = [(0.9829-0.9569) / 0.9569] = 100 X [0.026/0.9569] = 100 = 2.71%
Because of the additional services they offer, banks charge more. While banks will provide you with your case, traders won’t. Banks implement withdrawal fees and wire fees accordingly. Some banks offer prices that are close to the market price. Investors should choose such banks.
RevenuTrade, one of the most trusted online forex brokers, is a great choice. The sign up process is completely free. A demo account is the best way to get an idea of how FX markets work. If you feel that it is right for you, you can move on to a live account. We will guide you through online trading tools, and educate you about the risks and opportunities involved in becoming a successful trader.
