The spot rate is the price paid for a given currency with delivery as soon as possible. The default value date for most spot deals is two business days.
Some currencies are considered basic: USD, EUR, GBP, CHF, and JPY.
When you ask a dealer for a price such as EUR / USD, he will tell you two different prices – for example, 1.1212 – 1.1214. From the point of view of the dealer, the difference between the two bid and sell prices is called spread. If you want to buy EUR 1, you should theoretically pay $ 1.1214, and if you want to sell it – you will be paid $ 1.1212 by the dealer. In this case, the difference between “buy” and “sell” (spreads) will be 0.0002, or 2 pips. In fact, by buying one currency, you sell the other – and selling one currency means you buy the other.
The date of the currency markets is the settlement date of a transaction executed today. Typically, two business days are required to process the transactions and the required documents. It should be borne in mind that countries in which currencies are traded may be in different time zones and payments need to be synchronized. For both sides, the date may not be a Saturday, Sunday, or public holiday. If this happens, the spot date will be the next business day.
There is a possibility that the deal will be concluded with another value date other than the spot date: for example, the day of the deal or the next day. Then the exchange rate will be different from the spot exchange rate because of the differences in interest rates between the two countries.
Pips and figures
The following example illustrates what the pips and figures are:
The currencies are quoted primarily in the fourth decimal place, which means that one pips is equal to 1/10 000 of the currency’s price. In the above EUR / USD example, there is a difference of 2 pips between “buy” and “sell,” but there is no difference in the value of the figures.
At the Japanese yen, things are different. Due to the high denomination of the yen against the US dollar (for example, 102.38 – 102.40), the yen quote is only two decimal places. In this case, one pips equals 1/100 of the yen.
Quotations to the fifth character
Like some other brokers, Deltastock quotes currency pairs to the fifth decimal place in order to give more precise quotations, as well as more freedom for traders – as prices can be further broken. The fifth quote in the quote is 1/10 of a pips – e.g. EUR / USD 1.12347.
And, respectively, currency pairs including JPY are quoted to the third, instead of the second.
Direct and indirect quotes
Each country’s foreign exchange market is quoted directly or indirectly against the US dollar or other currency.
Let us consider the following major exchange rates as valid:
The direct quote is the sum of the local currency required to purchase one unit of the foreign currency and, respectively, the amount of local currency to be received after one unit of foreign currency is sold:
102.38 – 102.40 USD / JPY
This means that the dealer buys one dollar for 102.38 yen and sells it for 102.40 yen.
On the other hand, the indirect quote is the sum of the foreign currency required to buy one unit of the local currency. For example, this indirect quote was used to quote the British pound against the US dollar
1.3280 – 1.3283 GBP / USD
This means you have to pay 1.3283 USD to buy 1 GBP, and selling 1 GBP, you will get 1.3280 USD.
Basic and quoted currencies
The spot rate is the price of one currency relative to another. In the above example – 102.38 – 102.40 USD / JPY – USD is the base currency and the JPY – quoted. This is not the case in the second example – 1.3280 – 1.3283 GBP / USD – where the USD is the quoted currency because it is second in the GBP / USD pair.
Cross-rate is the exchange rate between two currencies that are not official in the country where the exchange rate is calculated. In the forex market, the concept of cross-currency is used for non-dollar currency pairs – also known as crosses. From the major currencies, we can get cross-bids for GBP, EUR, JPY and CHF. Exchange rates must be parity for all currencies. Otherwise there is a possibility of arbitrage or risk-free profit.
Example: calculation of cross-currency exchange rates
Let us consider the following major exchange rates as valid:
EUR / USD = 1.1212 / 14
GBP / USD = 1.3280 / 83
USD / JPY = 102.38 / 40
USD / CHF = 0.9711 / 14
Let’s now calculate GBP / CHF
GBP / USD: Buy: 1.3280 / Sell: 1.3283
USD / CHF: 0.9711 / 0.9714
GBP / USD x USD / CHF = 1.3280 x 0.9711 / 1.3283 x 0.9714
Sometimes the GBP / USD currency pair is influenced by cross-rate movements (non-dollar rates) such as EUR / GBP. EUR / GBP (GBP drop) triggered, for example, by Britain’s strong expectations of United The EU’s single market may lead to a decline in GBP / USD. On the other hand, news that the country will still remain in the European Economic Area could lead to a EUR / GBP decline and a GBP / USD rise.
What affects currency prices
Foreign exchange rates are influenced by a number of economic and political events – mainly from the demand and supply of the particular currency, as well as from inflation, interest rates and political stability.
Each of the listed factors, as well as some large market orders, can cause a high volatility in the currency price. Nevertheless, the size and volume of the forex market make it impossible for it to be driven in a certain direction by only one participant.
What is a Balance of Payments
The exchange rate of any foreign currency depends on a number of economic and financial factors affecting the country’s economy, which is the currency. One of the most important factors is the balance of payments. When the country has a balance of payments deficit, it searches for a foreign currency and is forced to sell significant amounts of its own currency in order to be able to pay for imports of goods and services. Consequently, a balance of payments deficit usually leads to a devaluation of the local currency relative to other currencies.
Why central bank intervention is important
Central banks, through their monetary policies, are actively participating in the foreign exchange market. This is done by various means. For example, on the one hand, by setting interest rates, and on the other – by increasing the supply of local currency on the market in order to lower its price or vice versa – to buy up to raise its price. driven by the achievement of different goals: pre-targeted levels of economic growth, unemployment, inflation,
Why inflation is important
Inflation is a general increase in the prices of goods and services, which reduces the purchasing power per unit of local currency. When one country’s inflation rises to one another, its currency is depreciated. Also, if inflation falls, the result will be a more expensive currency.