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Foreign Exchange Rate

Foreign Exchange Rate

What is the exchange rate?

The exchange rate refers to the price expressed by one country’s currency in another country’s currency, or the price between the two countries’ currencies. In the foreign exchange market, the exchange rate is displayed in five digits, such as: Euro EUR 0.9705 JPY JPY 119.95 GBP 1.5237 CHF CHF 1.5003 The minimum change in exchange rate is a point, that is, a digit change in the last digit, such as : Euro EUR 0.0001 JPY JPY 0.01 GBP GBP 0.0001 CHF CHF 0.0001 According to international practice, three English letters are usually used to indicate the name of the currency. The English after the Chinese name is the English code of the currency.

The price of exchange rate

Direct quotation method and indirect quotation method are the two types of pricing methods for exchange rate:

(1) Direct quotation method The direct quotation method, also known as the payable quotation method, calculates how many units of national currency are payable based on the foreign currency of a certain unit (1, 100, 1000, 10000). It is equivalent to calculating how much local currency is required to purchase a certain unit of foreign currency, so it is called the price-paying method. Most countries in the world, including China, currently use the direct price method. In the international foreign exchange market, the yen, the Swiss franc, the Canadian dollar, etc. are all direct price methods, such as the yen 119.05, that is, one dollar against 119.05 yen. Under the direct price method, if the foreign currency of a certain unit is more than the previous period, it means that the foreign currency value rises or the value of the local currency declines, which means that the foreign exchange rate rises; on the contrary, if you use less local currency, you can exchange it with the same currency. The amount of foreign currency, which indicates that the value of the foreign currency is down or the value of the local currency is rising, it is called the foreign exchange rate decline, that is, the value of the foreign currency is proportional to the rise and fall of the exchange rate.

(2) Indirect quotation method,which is also known as the levy method. It is based on the national currency of a certain unit (such as 1 unit) to calculate the foreign currency receivable for several units. In the international foreign exchange market, the euro, the pound, the Australian dollar, etc. are all indirect price methods. For example, the euro 0.9705 is one euro against 0.9705 US dollars. In the indirect price method, the amount of the national currency remains unchanged, and the amount of the foreign currency changes as the value of the national currency changes. If the amount of foreign currency that can be exchanged in a certain amount of local currency is less than that in the previous period, this indicates that the value of the foreign currency has risen, and the value of the local currency has decreased, that is, the foreign exchange rate has decreased. Conversely, if the amount of foreign currency that can be exchanged for a certain amount of local currency is more than the previous period, the foreign currency has decreased. The value of the local currency has risen, that is, the foreign exchange rate has risen, that is, the value of the foreign currency is inversely proportional to the rise and fall of the exchange rate. The quotation in the foreign exchange market is generally a two-way quotation, that is, the quoting party simultaneously reports its own buying price and selling price, and the customer decides the buying and selling direction. The smaller the spread between the bid price and the ask price, the lower for the investor. The quotation spread of inter-bank transactions is normally 2-3 points. The quotation spread of banks (or dealers) to customers varies greatly depending on the situation. At present, the quotation spread of foreign margin trading is basically 3-5 points, Hong Kong is at 6- At 8 o’clock, domestic banks’ firm trading ranged from 10-40 points.

In the international market, almost all currencies have an exchange rate against the US dollar. The exchange rate between a non-US dollar currency and another non-US dollar currency often needs to be calculated through the two exchange rates against the US dollar. The calculated exchange rate is called the cross exchange rate. A notable feature of the cross exchange rate is that an exchange rate involves it between two non-US dollar currencies.

What is the “point” (basic point) in the foreign exchange rate?

According to market practice, the price of foreign exchange rates is usually composed of five significant figures, from the right to the left, the first is called “X points”, which is the smallest unit that constitutes exchange rate changes; the second is called “X” Ten points”, and so on. Such as: 1 euro = 1.1011 US dollars; 1 US dollar = 120.55 yen, the euro against the US dollar from 1.1010 to 1.1015, said the euro against the US dollar increased by 5 points against the yen from 120.50 to 120.00, said the dollar fell 50 points against the yen .

Fixed exchange rate and floating exchange rate

A fixed exchange rate is an exchange rate in which the exchange rate between one country’s currency and another’s currency is basically fixed. The fixed exchange rate system was implemented in the gold standard system from the early 19th century to the 1930s and the US dollar-centered international monetary system after the Second World War to the early 1970s. The fixed exchange rate is not completely fixed, but rather fluctuates around the upper and lower limits of a relatively fixed parity. For example, after the Second World War, the fixed exchange rate system centered on the US dollar, the official parity of the currencies of the member countries of the International Monetary Fund is parity. The currency exchange rate of each member country can only fluctuate by 1% above the parity, and the central bank intervenes.

The floating exchange rate refers to the fluctuation ratio of the exchange rate between a country’s currency and another country’s currency, and is determined by the supply and demand relationship in the foreign exchange market. On August 15, 1971, the United States implemented a new economic policy, allowing the US dollar exchange rate to float freely. By 1973, countries generally implemented a floating exchange rate system. It was also from that time that the foreign exchange market continued to develop with the constant fluctuation of various exchange rates. The floating exchange rate is divided into two types: “free floating exchange rate” and “management floating exchange rate” according to whether the government intervenes. In real life, the government does not take any interventions on the exchange rate of its own currency, and there are few countries that adopt a free floating exchange rate. Since the exchange rate has a major impact on the country’s balance of payments and economic balance, most governments control the exchange rate by adjusting interest rates, buying and selling foreign exchange in the foreign exchange market, and controlling capital movement.

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