Basic Principles of the FOREX

Exchange Rates

Exchange rates (Foreign-exchange rate, Forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. For example, an exchange rate of 32 U.S. Dollar (USD) to the Swiss Franc (CHF) means that USD 32 is worth the same as CHF 1.

The exchange rate value is found by stating the number of units of the "term currency" that can be bought in terms of 1 unit of the "base currency."

For example, for the quotation EUR/USD the exchange rate is 1.5877. This translates into 1.5877 U.S. Dollars per Euro, the term currency is USD and the base currency is EUR.

Fixed Exchange Rate

A fixed exchange rate (also called a pegged exchange rate) is a type of exchange rate where a currency's value is matched to the value of another single currency or to a basket (a collection of currencies whose value is used as a benchmark for value) of other currencies.

Many times the purpose of the fixed exchange rate is to steady the value of a currency, via the currency it is "pegged" to. It also serves as a means to control inflation. A sometimes negative result of this is that as the reference value (the value of the currency it is pegged to) rises and falls, so does the currency pegged to it.

Spot Exchange Rate

The spot exchange rate also refers to the current exchange rate. Spot exchange rates are the price a buyer expects to pay for a foreign currency in another currency. Other names for the spot exchange rate are "straightforward rates," "benchmark rates," or "outright rate."

Forward Exchange Rate

The forward exchange rate is the exchange rate that is quoted today but used for delivery and payment on a future date.

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