exchange ratesreal exchange rateforeign exchange rateforeign exchangecurrency exchange raterate of exchangecurrency exchangesexchange-ratecurrency conversionCurrency Trading
In finance, an exchange rate is the rate at which one currency will be exchanged for another.wikipedia
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foreign exchangeForexcurrency exchange
Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers, and where currency trading is continuous: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday.
This market determines foreign exchange rates for every currency.
For example, an interbank exchange rate of 114 Japanese yen to the United States dollar means that ¥114 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥114.
To stabilize the Japanese economy the exchange rate of the yen was fixed at ¥360 per $1 as part of the Bretton Woods system.
forwardforward exchange rate premiumForward exchange rate# Unbiasedness hypothesis
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.
The forward exchange rate (also referred to as forward rate or forward price) is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.
spot exchange ratespotFX spot
The spot exchange rate refers to the current exchange rate.
The exchange rate at which the transaction is done is called the spot exchange rate.
Bretton WoodsBretton Woods AgreementBretton Woods Institutions
China was not the only country to do this; from the end of World War II until 1967, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments.
Using direct quotation, if the home currency is strengthening (that is, appreciating, or becoming more valuable) then the exchange rate number decreases.
Short-term changes in the value of a currency are reflected in changes in the exchange rate.
exchange controlsexchange controlcurrency controls
; According to the level of foreign exchange controls:
These controls allow countries to better manage their economies by controlling the inflow and outflow of currency, which may otherwise create exchange rate volatility.
fixed exchange ratepeggedfixed
A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the revaluation (usually devaluation) of a currency.
The gold standard or gold exchange standard of fixed exchange rates prevailed from about 1870 to 1914, before which many countries followed bimetallism.
(The fourth decimal place is usually referred to as a "pip").
In finance, specifically in foreign exchange markets, a percentage in point or price interest point (pip) is a unit of change in an exchange rate of a currency pair.
monetarymonetary policiesexpansionary monetary policy
Further goals of a monetary policy are usually to contribute to the stability of gross domestic product, to achieve and maintain low unemployment, and to maintain predictable exchange rates with other currencies.
average CNY exchange rateChinese yuan renminbiUS$62,000
For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1.
Although it is not a freely convertible currency, and has an official exchange rate, the CNY plays an important role in the world economy and international trade.
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.
Based on market exchange rates, the UK is today the fifth-largest economy in the world and the second-largest in Europe after Germany.
balance of paymentbalance-of-paymentsaccount balance
The balance of payments model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance.
Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies.
central bankscentral bankingcentral banking system
Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. A country may gain an advantage in international trade if it controls the market for its currency to keep its value low, typically by the national central bank engaging in open market operations in the foreign exchange market.
The bank was soon accused by the bullionists of causing the exchange rate to fall from over issuing banknotes, a charge which the Bank denied.
Ship transportshippingwater transport
For carrier companies shipping goods from one nation to another, exchange rates can often impact them severely.
Transport by water is cheaper than transport by air, despite fluctuating exchange rates and a fee placed on top of freighting charges for carrier companies known as the currency adjustment factor (CAF).
If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the exchange rate and GDP deflators (price levels) of the two countries, and the real exchange rate would always equal 1.
The PPP exchange rate may be different from the market exchange rate because of transportation costs, tariffs, and other frictions.
uncovered interest rate parityCovered interest rate parityuncovered interest parity
Uncovered interest rate parity (UIRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential.
Given foreign exchange market equilibrium, the interest rate parity condition implies that the expected return on domestic assets will equal the exchange rate-adjusted expected return on foreign currency assets.
For example, the purchasing power of the US dollar relative to that of the euro is the dollar price of a euro (dollars per euro) times the euro price of one unit of the market basket (euros/goods unit) divided by the dollar price of the market basket (dollars per goods unit), and hence is dimensionless.
The definitive values of one euro in terms of the exchange rates at which the currency entered the euro are shown on the right.
trade weighted indexeffective exchange rateeffective exchange rates
Bilateral exchange rate involves a currency pair, while an effective exchange rate is a weighted average of a basket of foreign currencies, and it can be viewed as an overall measure of the country's external competitiveness.
The trade-weighted effective exchange rate index is an economic indicator for comparing the exchange rate of a country against those of their major trading partners.
Currency optionforeign currency optionsforeign exchange
Currencies can be traded at spot and foreign exchange options markets.
In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
foreign exchangeforeign-exchange reservesforeign reserves
A nation with a trade deficit will experience a reduction in its foreign exchange reserves, which ultimately lowers (depreciates) the value of its currency.
Thus, the quantity of foreign exchange reserves can change as a central bank implements monetary policy, but this dynamic should be analyzed generally in the context of the level of capital mobility, the exchange rate regime and other factors.
If US interest rates increase while Japanese interest rates remain unchanged then the US dollar should depreciate against the Japanese yen by an amount that prevents arbitrage (in reality the opposite, appreciation, quite frequently happens in the short-term, as explained below).
As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge.
open market operationsopen-market operationsbuying operations
A country may gain an advantage in international trade if it controls the market for its currency to keep its value low, typically by the national central bank engaging in open market operations in the foreign exchange market.
Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation.
Table of historical exchange ratesTables of historical exchange rates to the USD2006 exchange rates
An exchange rate represents the value of one currency in another.
In the early twenty-first century it was widely asserted that the People's Republic of China had been doing this over a long period of time.
The unrealistic levels at which exchange rates were pegged led to a strong black market in currency transactions.