Forex exchange rate is the value of two different currencies and how they relate to each other. It is used by corporations, tax authorities, auditing firms, and financial institutions and is calculated on the basis of information supplied by leading market data contributors. Forex exchange rate says how much of one currency is needed to buy a unit of another. The exchange rate is essentially a price, which can be analyzed the same way as other market prices. So when we speak of an A to B exchange rate of C, it means that if we pay 1 unit of A, we get C units of B in return.
You may find several Internet sites that instantly offer exchange rates of various currencies. What all you have to do is to select the currency pairs and with a click of the mouse you get the forex exchange rates. Additionally you can convert a specific amount against the specified currency. You can also convert using the historic rate for a particular date.
The exchange rates are therefore prices for different currencies. So on a specific day, if the U.S. to Japan exchange rate is 115 yen, it means you can purchase 115 Japanese yen in exchange for 1 U.S. dollar. With a simple formula, you can find out how many U.S. dollars you can get for 1 Japanese yen.
Japan to U.S. exchange rate = 1 / U.S. to Japan exchange rate
Japan to U.S. exchange rate = 1 / 115 = .00869
Therefore one Japanese yen is equal to 0.00869 U.S. dollars.
Knowing the basics regarding the Forex exchange will help you to get started in understanding the forex trading. The majority of the currencies are traded against the US dollar (USD). The four next most-traded currencies are the euro (EUR), the Japanese yen (JPY), British pound sterling (GBP), and the Swiss franc (CHF). These five currencies are called the “the Majors”. Some also include the Australian dollar (AUD) in this group.
The forex exchange rates are always quoted in pairs. The first currency is referred as the base currency and the second as the counter or quote currency. The counter currency is therefore the numerator in the ratio, and the base currency is the denominator. The value of the base currency is always 1. Therefore, the forex exchange rate tells a buyer how much of the counter currency must be paid to get one unit of the base currency. On the other hand, the forex exchange rate tells the seller how much he is going to receive in the counter currency while selling the base currency.
This ratio in the forex exchange rate is also known as ‘cross rates’. This term is used when it does not involve US dollars and involves any other two foreign currencies. The concept of pip is also very important in forex exchange rates. The forex exchange rate is determined independently. The buyers and sellers and the supply and demand of certain currencies determine the forex exchange rates.