Foreign Currency Exchange Rates

Foreign Currency
Exchange Rates

By
www.TheForexNittyGritty.com

Foreign currency exchange rates are
set in the major Forex markets of the
world which are London, New York
and Tokyo.

http://www.theforexnittygritty.com/
forex-trading/foreign-currencyexchange-rates

Forex markets were developed to
facilitate international trade.


Foreign currency exchange rates vary
according to the perceived value of
one currency versus another.


Those doing business across
international borders use tools such
as Forex currency options trading to
hedge the risk that foreign currency
exchange rates will change and cause
business losses.

How Many Yen to
the US Dollar?

As in all markets, pricing is based on
supply and demand.


If the US Federal Reserve backs off its
quantitative easing financial stimulus
program, interest rates in the US will
go up.


This will make the US dollar more
attractive to Forex traders.


The demand for US dollars goes up.


A trader who is holding Yen, British
pounds, Euros or other currencies
may wish to buy US dollars but only at
the right price.


This is the supply issue.


Traders look at the relative strength of
the economies of the two nations
whose currencies they trade.


They look at balances of
payments, national debts or
reserves, monetary policy of the
respective central banks, employment
numbers and national politics.

Traders also consider what the market
as a whole is doing.


Technical analysis of Forex pairs
allows traders to profit from the daily
and even minute to minutes changes
in foreign currency exchange rates.


Technical analysis is based on
statistics and is more accurate when
trading volume and liquidity are high.


Thus traders use these tools in trading
the major Forex currencies, one
against another.


The major currencies are these:
United States Dollar

USD

Euro

EUR

British Pound

GBP

Swiss franc

CHF

Canadian Dollar

CAD

Australian Dollar

AUD


Eighty-five percent of all foreign
currency trades include the US dollar.
In fact, most minor currencies only
trade versus the dollar.


Thus foreign currency exchange rates
of one minor currency versus another
are really the rate of one currency
versus the dollar and the rate of the
dollar versus the second currency.

What Will the
Future Bring?

When an airline in South Korea buys a
jet from Boeing it will pay in US dollars
upon delivery.


The order is placed and a contract is
signed.


However, the plane may not be
available for a year at which time the
South Korean airline will need to
convert its South Korean Won (KRW)
to US dollars (USD) to make payment.

Let us say that the price of the jet is
$40 million USD. At the current
exchange rate:
40,000,000.00 USD =
42,689,767,200.00 KRW

The Korean airline will convert 42.7
billion won to make the purchase of a
$40 million jet.


However, the company cannot simply
put this amount of money in the bank
and wait because foreign currency
exchange rates vary over time.


The common approach is for the
buyer, in the case the airline, to
purchase call options on the US dollar
with South Korean won.


If the value of the dollar rises against
the won the airline will simply execute
the call contract which will give it the
right to buy dollars with won at the
original contract price.

If the dollar falls against the won in a
year the company lets the call contract
expire and simply buys the necessary
number of dollars but with fewer won
than expected and receives the
airplane.

Options allow companies doing
business across borders to hedge risk
on one hand and allow currency
speculators to engage in profitable
currency trading as well.


Foreign Currency Exchange Rates

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Foreign Currency Exchange Rates