What Is A Rate?

In currency trading the rate assigned to a given foreign currency is the amount for which it will trade in relation to another foreign currency.  Unlike stocks, currency exchange rates cannot be expressed in a single amount.  Currency rates need a pairing.  This pairing must include a base currency and a quote currency.  The currency exchange rate will be for the quote currency.  The base currency will always be assigned a value of one.  To visualize this, use this example:


An investor is looking for the value of the Euro.  The Euro has no inherent value without being paired with a base currency.  The base currency for this example will be the US Dollar.  The currency exchange rate would thus be expressed like this:

USD/EUR .896

The above quotation is simply saying that for every single unit (one US Dollar) of the base currency, the .896 of a Dollar will be provided in US Dollars.  Using this example rate above, if one was trading 10,000 USD it would yield exactly:  8,960 Euros

Currency Exchange Rates

Currency exchange rates are hugely important not just to the international traveler, but much more so to banks, international governments, large corporations, and now much more commonly: currency traders.  Banks need to exchange currency for to complete transactions and replenish their holdings with their domestic currency.  International governments often need to exchange currency to make payments to another nation or to maintain their own national currency.  Large corporations especially those who export goods must change payments from foreign countries into their own domestic currency.  Currency traders, while having less of an actual need to move money between national currencies, do it to make profit.  As currency exchange rates fluctuate a currency trader can effectively buy and sell foreign currencies at well timed positions in order to make money of these movements.  Currency rates affect almost all aspects of commerce and finance in one form or another.

Related posts:

  1. What Is A Currency Change Rate?
  2. What Is A Cross Rate?
  3. Currency Pair Quotes
  4. What Are Swap Meets?
  5. What Is A Currency Converter?

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