FINANCE studies and addresses the ways in which individuals, businesses, and organizations raise, allocate,
and use monetary resources over time, taking into account the risks entailed in their projects. The
term "finance" may thus incorporate any of the following:
* The study of money and other assets;
* The management and control of those assets;
* Profiling and managing project risks;
* The science of managing money;
* As a verb, "to finance" is to provide funds for business or for an individual's large purchases
(car, home, etc.).
The activity of finance is the application of a set of techniques that individuals and organizations
(entities) use to manage their money, particularly the differences between income and expenditure
and the risks of their investments.
An income that exceeds its expenditure can lend or invest the excess income. On the other hand, an
entity whose income is less than its expenditure can raise capital by borrowing or selling equity
claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial
intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest,
the borrower pays a higher interest than the lender receives, and the financial intermediary pockets
the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from
lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow
borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators
of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors
like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it
part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares
outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the
stock, the company receives cash, which it uses to expand its business in a process called "equity
financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the
company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses
(corporate finance), etc., as well as by a wide variety of organizations including schools and non-
profit organizations. In general, the goals of each of the above activities are achieved through the
use of appropriate financial instruments, with consideration to their institutional setting.
Friday, November 2, 2007
foreign exchange market
foreign exchange market is a zero sum game in which there are many experienced well-capitalized
professional traders (e.g. working for banks) who can devote their attentions full time to trading. An
inexperienced retail trader will have a significant information disadvantage compared to these
traders.
Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of
Gambler's Ruin. In a fair game (one with no information advantages) between two players that
continues until one trader goes bankrupt, the player with the lower amount of capital has a higher
probability of going bankrupt first. Since the retail speculator is effectively playing against the
market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.
The retail trader always pays the bid/ask spread which makes his odds of winning less than those of
a fair game. Additional costs may include margin interest, or if a spot position is kept open for
more than one day the trade must be "resettled" each day, each time costing the full bid/ask
spread.
professional traders (e.g. working for banks) who can devote their attentions full time to trading. An
inexperienced retail trader will have a significant information disadvantage compared to these
traders.
Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of
Gambler's Ruin. In a fair game (one with no information advantages) between two players that
continues until one trader goes bankrupt, the player with the lower amount of capital has a higher
probability of going bankrupt first. Since the retail speculator is effectively playing against the
market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.
The retail trader always pays the bid/ask spread which makes his odds of winning less than those of
a fair game. Additional costs may include margin interest, or if a spot position is kept open for
more than one day the trade must be "resettled" each day, each time costing the full bid/ask
spread.
Forex scam
Forex scam
is any trading scheme used to defraud individual traders by convincing them that they can expectto gain an unreasonably high profit by trading in the foreign exchange market [1]. This market
would be a zero-sum game were it not for the fact that there are brokerage commissions, which
technically make forex a "negative-sum" game. "The market has long been plagued by swindlers
preying on the gullible," according to the New York Times [2].
These scams might include churning of customer accounts for the purpose of generating
commissions, selling software that is supposed to guide the customer to large profits,[3]
improperly managed "managed accounts",[4] false advertising,[5] Ponzi schemes and outright
fraud.[6] It also refers to any retail forex broker who indicates that trading foreign exchange is a low
risk, high profit investment.[7]
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign
exchange market in the United States, has noted an increase in the amount of unscrupulous activity
in the non-bank foreign exchange industry.[8]
An official of the National Futures Association was quoted[9] as saying, "Retail forex trading has
increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also
increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission
has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who
lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of
the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their
customers and they should make sure customers understand what they are doing. Now if people
go online, on non-bank portals, how is this control being done?"
The highly technical nature of retail forex industry, the OTC nature of the market, and the loose
regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory
authorities can find it very difficult to prove that market manipulation has occurred since there is no
central currency market, but rather a number of more or less interconnected marketplaces provided
by interbank market make
Foreign exchange market
The foreign exchange market is unique because of
* its trading volume,
* the extreme liquidity of the market,
* the large number of, and variety of, traders in the market,
* its geographical dispersion,
* its long trading hours: 24 hours a day (except on weekends),
* the variety of factors that affect exchange rates.
* the low margins of profit compared with other markets of fixed income (but profits can be
high due to very large trading volumes)
According to the BIS,[1] average daily turnover in traditional foreign exchange markets is estimated
at $3,210 billion. Daily averages in April for different years, in billions of US dollars, are presented
on the chart below:
This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as
follows:
* $1,005 billion in spot transactions
* $362 billion in outright forwards
* $1,714 billion in forex swaps
* $129 billion estimated gaps in reporting
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. Forex futures volume has
grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market
volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7
trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo
and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional
foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a
day. This was more than ten times the size of the combined daily turnover on all the world’s equity
markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has
more than doubled since 2001. This is largely due to the growing importance of foreign exchange
as an asset class and an increase in fund management assets, particularly of hedge funds and
pension funds. The diverse selection of execution venues such as internet trading platforms has also
made it easier for retail traders to trade in the foreign exchange market. [4]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one
another, there is no central exchange or clearing house. The biggest geographic trading centre is
the UK, primarily London, which according to IFSL estimates has increased its share of global
turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. RPP
The ten most active traders account for almost 73% of trading volume, according to The Wall
Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the
market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the
price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-
maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of
currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203.
Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the
difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers'
checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide
(i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as
little as 1 to 2 pips.
Market participants
Financial markets
Unlike a stock market, where all participants have access to the same prices, the forex market is
divided into levels of access. At the top is the inter-bank market, which is made up of the largest
investment banking firms. Within the inter-bank market, spreads, which are the difference between
the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside
the inner circle. As you descend the levels of access, the difference between the bid and ask prices
widens (from 0-1 pip to 1-2 pips only for major currencies like the Euro). This is due to volume. If a
trader can guarantee large numbers of transactions for large amounts, they can demand a smaller
difference between the bid and ask price, which is referred to as a better spread. The levels of access
that make up the forex market are determined by the size of the “line” (the amount of money with
which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After
that there are usually smaller investment banks, followed by large multi-national corporations
(which need to hedge risk and pay employees in different countries), large hedge funds, and even
some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance
companies, mutual funds, and other institutional investors have played an increasingly important
role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In
addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of
both number and overall size” Central banks also participate in the forex market to align currencies
to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of
speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading
is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the
bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank
trading and matching anonymous counterparts for small fees. Today, however, much of this
business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP),
Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Dukascopy - Swiss FX
Marketplace, FXMarketSpace, Bloomberg, and TradeBook(R). The broker squawk box lets traders
listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is
noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign
exchange to pay for goods or services. Commercial companies often trade fairly small amounts
compared to those of banks or speculators, and their trades often have little short term impact on
market rates. Nevertheless, trade flows are an important factor in the long-term direction of a
currency's exchange rate. Some multinational companies can have an unpredictable impact when
very large positions are covered due to exposures that are not widely known by other market
participants.
* its trading volume,
* the extreme liquidity of the market,
* the large number of, and variety of, traders in the market,
* its geographical dispersion,
* its long trading hours: 24 hours a day (except on weekends),
* the variety of factors that affect exchange rates.
* the low margins of profit compared with other markets of fixed income (but profits can be
high due to very large trading volumes)
According to the BIS,[1] average daily turnover in traditional foreign exchange markets is estimated
at $3,210 billion. Daily averages in April for different years, in billions of US dollars, are presented
on the chart below:
This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as
follows:
* $1,005 billion in spot transactions
* $362 billion in outright forwards
* $1,714 billion in forex swaps
* $129 billion estimated gaps in reporting
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. Forex futures volume has
grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market
volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7
trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo
and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional
foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a
day. This was more than ten times the size of the combined daily turnover on all the world’s equity
markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has
more than doubled since 2001. This is largely due to the growing importance of foreign exchange
as an asset class and an increase in fund management assets, particularly of hedge funds and
pension funds. The diverse selection of execution venues such as internet trading platforms has also
made it easier for retail traders to trade in the foreign exchange market. [4]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one
another, there is no central exchange or clearing house. The biggest geographic trading centre is
the UK, primarily London, which according to IFSL estimates has increased its share of global
turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. RPP
The ten most active traders account for almost 73% of trading volume, according to The Wall
Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the
market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the
price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-
maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of
currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203.
Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the
difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers'
checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide
(i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as
little as 1 to 2 pips.
Market participants
Financial markets
Unlike a stock market, where all participants have access to the same prices, the forex market is
divided into levels of access. At the top is the inter-bank market, which is made up of the largest
investment banking firms. Within the inter-bank market, spreads, which are the difference between
the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside
the inner circle. As you descend the levels of access, the difference between the bid and ask prices
widens (from 0-1 pip to 1-2 pips only for major currencies like the Euro). This is due to volume. If a
trader can guarantee large numbers of transactions for large amounts, they can demand a smaller
difference between the bid and ask price, which is referred to as a better spread. The levels of access
that make up the forex market are determined by the size of the “line” (the amount of money with
which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After
that there are usually smaller investment banks, followed by large multi-national corporations
(which need to hedge risk and pay employees in different countries), large hedge funds, and even
some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance
companies, mutual funds, and other institutional investors have played an increasingly important
role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In
addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of
both number and overall size” Central banks also participate in the forex market to align currencies
to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of
speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading
is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the
bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank
trading and matching anonymous counterparts for small fees. Today, however, much of this
business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP),
Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Dukascopy - Swiss FX
Marketplace, FXMarketSpace, Bloomberg, and TradeBook(R). The broker squawk box lets traders
listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is
noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign
exchange to pay for goods or services. Commercial companies often trade fairly small amounts
compared to those of banks or speculators, and their trades often have little short term impact on
market rates. Nevertheless, trade flows are an important factor in the long-term direction of a
currency's exchange rate. Some multinational companies can have an unpredictable impact when
very large positions are covered due to exposures that are not widely known by other market
participants.
Retail forex
High leveraged
The idea of margin (leverage) and floating loss is another important trading concept and is perhaps
best understood using an example. Most retail Forex market makers permit 100:1 leverage, but
also, crucially, require you to have a certain amount of money in your account to protect against a
critical loss point. For example, if a $100,000 position is held in Eur/USD on 100:1 leverage, the
trader has to put up $1,000 to control the position. However, in the event of a declining value of
your positions, Forex market makers, mindful of the fast nature of forex price swings and the
amplifying effect of leverage, typically do not allow their traders to go negative and make up the
difference at a later date. In order to make sure the trader does not lose more money than is held in
the account, forex market makers typically employ automatic systems to close out positions when
clients run out of margin (the amount of money in their account not tied to a position). If the trader
has $2,000 in his account, and he is buying a $100,000 lot of EUR/USD, he has $1,000 of his $2,000
tied up in margin, with $1,000 left to allow his position to fluctuate downward without being closed
out.
Typically a trader's trading platform will show him three important numbers associated with his
account: his balance, his equity, and his margin remaining. If trader X has two positions: $100,000
long (buy) in EUR/USD, and $100,000 short (sell) in GBP/USD, and he has $10,000 in his account,
his positions would look as follows: Because of the 100:1 leverage, it took him $1,000 to control
each position. This means that he has used up $2,000 in his margin, out of a $10,000 account, and
thus he has $8,000 of margin still available. With this margin, he can either take more positions or
keep the margin relatively high to allow his current positions to be maintained in the event of
downturns. If the client chooses to open a new position of $100,000, this will again take another
$1,000 of his margin, leaving $7,000. He will have used up $3,000 in margin among the three
positions. The other way margin will decrease is if the positions he currently has open lose money. If
his 3 positions of $100,000 decrease by $5,000 in value (which is fairly common), he now has, of his
original $7,000 in margin, only $2,000 left.
If you have a $10,000 account and only open one $100,000 position, this has committed only
$1,000 of your money plus you must maintain $1,000 in margin. While this leaves $9,000 free in
your account, it is possible to lose almost all of it if the speculation loses money.
The idea of margin (leverage) and floating loss is another important trading concept and is perhaps
best understood using an example. Most retail Forex market makers permit 100:1 leverage, but
also, crucially, require you to have a certain amount of money in your account to protect against a
critical loss point. For example, if a $100,000 position is held in Eur/USD on 100:1 leverage, the
trader has to put up $1,000 to control the position. However, in the event of a declining value of
your positions, Forex market makers, mindful of the fast nature of forex price swings and the
amplifying effect of leverage, typically do not allow their traders to go negative and make up the
difference at a later date. In order to make sure the trader does not lose more money than is held in
the account, forex market makers typically employ automatic systems to close out positions when
clients run out of margin (the amount of money in their account not tied to a position). If the trader
has $2,000 in his account, and he is buying a $100,000 lot of EUR/USD, he has $1,000 of his $2,000
tied up in margin, with $1,000 left to allow his position to fluctuate downward without being closed
out.
Typically a trader's trading platform will show him three important numbers associated with his
account: his balance, his equity, and his margin remaining. If trader X has two positions: $100,000
long (buy) in EUR/USD, and $100,000 short (sell) in GBP/USD, and he has $10,000 in his account,
his positions would look as follows: Because of the 100:1 leverage, it took him $1,000 to control
each position. This means that he has used up $2,000 in his margin, out of a $10,000 account, and
thus he has $8,000 of margin still available. With this margin, he can either take more positions or
keep the margin relatively high to allow his current positions to be maintained in the event of
downturns. If the client chooses to open a new position of $100,000, this will again take another
$1,000 of his margin, leaving $7,000. He will have used up $3,000 in margin among the three
positions. The other way margin will decrease is if the positions he currently has open lose money. If
his 3 positions of $100,000 decrease by $5,000 in value (which is fairly common), he now has, of his
original $7,000 in margin, only $2,000 left.
If you have a $10,000 account and only open one $100,000 position, this has committed only
$1,000 of your money plus you must maintain $1,000 in margin. While this leaves $9,000 free in
your account, it is possible to lose almost all of it if the speculation loses money.
A Forex swap (or FX swap)
a forex swap (or FX swap) is an over-the-counter short term interest rate derivative instrument. In emerging money markets, forex swaps are usually the first derivative instrument to be traded, ahead of forward rate agreements.
Foreign Exchange
A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.
Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by United States accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency.
Foreign Exchange
A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.
Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by United States accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency.
EXCHAGE RATE
EXCHAGE RATE
(also known as the foreign-exchange rate, forex rate or FX rate) between two
currencies specifies how much one currency is worth in terms of the other. For example an exchange
rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth
the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some
estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. 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.
An exchange rate quotation is given by stating the number of units of a price currency that can be
bought in terms of 1 unit currency (also called base currency). For example, in a quotation that says
the EUR/USD exchange rate is 1.3 (USD per EUR), the price currency is USD and the unit currency is
EUR.
Quotes using a country's home currency as the price currency (e.g., 0.50593 = $1 in the UK) are
known as direct quotation or price quotation (from that country's perspective) ([1]) and are used by
most countries.
Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are
known as indirect quotation or quantity quotation and are used in British newspapers and are also
common in Australia, New Zealand and the eurozone.
* direct quotation: 1 foreign currency unit = x home currency units
* indirect quotation: 1 home currency unit = x foreign currency units
Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or
becoming more valuable) then the exchange rate number decreases. Conversely if the foreign
currency is strengthening, the exchange rate number increases and the home currency is
depreciating.
When looking at a currency pair such as EUR/USD, many times the first component (EUR in this
case) will be called the base currency. The second is called the counter currency. For example :
EUR/USD = 1.33866, means EUR is the base and USD the counter, so 1 EUR = 1.33866 USD.
Currency pairs are given with four decimal places, except JPY with two decimal places (EUR/USD :
1.3386 - EUR/JPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1,
quotes frequently include 5 decimal places.
(also known as the foreign-exchange rate, forex rate or FX rate) between two
currencies specifies how much one currency is worth in terms of the other. For example an exchange
rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth
the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some
estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. 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.
An exchange rate quotation is given by stating the number of units of a price currency that can be
bought in terms of 1 unit currency (also called base currency). For example, in a quotation that says
the EUR/USD exchange rate is 1.3 (USD per EUR), the price currency is USD and the unit currency is
EUR.
Quotes using a country's home currency as the price currency (e.g., 0.50593 = $1 in the UK) are
known as direct quotation or price quotation (from that country's perspective) ([1]) and are used by
most countries.
Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are
known as indirect quotation or quantity quotation and are used in British newspapers and are also
common in Australia, New Zealand and the eurozone.
* direct quotation: 1 foreign currency unit = x home currency units
* indirect quotation: 1 home currency unit = x foreign currency units
Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or
becoming more valuable) then the exchange rate number decreases. Conversely if the foreign
currency is strengthening, the exchange rate number increases and the home currency is
depreciating.
When looking at a currency pair such as EUR/USD, many times the first component (EUR in this
case) will be called the base currency. The second is called the counter currency. For example :
EUR/USD = 1.33866, means EUR is the base and USD the counter, so 1 EUR = 1.33866 USD.
Currency pairs are given with four decimal places, except JPY with two decimal places (EUR/USD :
1.3386 - EUR/JPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1,
quotes frequently include 5 decimal places.
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