Chapter 1 Forex Basics Chapter 2 Fundamental Factors Chapter 3 Technical Tools

Download PDF (2.97MB) Download PDF (2.44MB) Download PDF (2.15MB)

Calculations of Exchange Rates

What Is Being Exchanged?

Currencies are the backbone of the foreign exchange market. Just like the commodities gold, silver, or grain, currencies are given prices that are representative of their worth. The foreign exchange market’s rates, like any other free floating market, are controlled by the forces of supply and demand. Forex trading is a type of investment where a trader speculates on the future movements of different currencies’ exchange rates.

Exchange rates come in pairs, where one country’s currency is measured against another country’s. Exchange rates affect a country’s consumers and producers because their economy is engaged in world trade. Most individuals partake in foreign exchange daily, regardless of whether they trade in the forex market, because many common goods like food and clothing are materialized abroad. In order for stores to sell these products, there had to have been a currency transaction between manufacturers abroad and retail sellers at home. The retail store needs to convert some of its revenue into foreign currency in order to pay their foreign suppliers.

Calculations of Exchange Rates

If you are an American traveling to Italy, you too have domestic money that you need converted into a foreign currency. Suppose the currency exchange booth informs you that it costs 1.34 US Dollars to receive 1 Euro. The exchange rate at this time between the two currencies is 1.34 $/€ (dollars/euro). In Forex notation the currency pairs are flipped when quoted, therefore the above rate is written - 1.3400 EUR/USD. It takes 1.3400 of the bottom currency in a pair (USD), the "counter currency", to get 1 of the top currency in a pair (EUR), the "base currency". Calculator and Quotes Use the currency calculator to see how many Dollars you would need to buy a €1,000 World Cup soccer ticket at the present exchange rate, value of your current salary or anything else, using IdealWorld Forex's Currency Converter.

Now, take a look at the current quotes being shown on the Forex market. Remember that you are looking at how much of the bottom currency it takes to buy 1 of the top currency in the pair. Also notice the change in their values against each other during the current trading session and since the beginning of the week. A currency that is experiencing an increase in value is appreciating, while a declining currency is depreciating.

Next Page