By exchange rates we mean the value of a country's currency expressed in terms of another country's currency. The exchange rates are sometimes fixed or pegged, that is determined by a country’s monetary authority- the central bank- but, in a market economy, they are established like any other price by the interaction of supply and demand that means they are floating rates. But sometimes the central banks intervene on currency markets to counteract the effects of massive speculative demand. They do this by buying or selling big amounts of foreign currency, hence one may speak of a managed floating exchange rate.
Quotations of exchange rates may be direct quotations and or indirect quotations. A direct quotation shows how many units of the home currency are related t
o one or a hundred units of a foreign currency. Conversely the indirect quotation shows how many units of a foreign currency are the equivalents of a unit of the home currency. The latter type of quotation is used in the U.K. As for the rates, there are two quoted rates- one is the selling or offered rate, for instance the price at which currency is sold, and a buying or bid rate, for example the price at which a currency is bought. The difference between the two rates, also called spread or margin, is the profit made by the bank.
One may also distinguish the rates for foreign currency from the rates of foreign exchange. The former are usually lower than the latter. This is because in the settlement of transactions foreign exchange is of greater importance, therefore, demand for it is more active. Usually the quoted rate of exchange is a spot rate that is for immediate delivery and payment of the currency concerned. If a forward rate is quoted that means the price is quoted for delivery or payment at some future time. The latter rates are quoted either at a premium on spot rates, meaning at higher prices than spot, or at a discount on spot rates for example at lower prices than spot rates.
Exchange Rates by Cristina Nuta for FamousWhy.com
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