In the domain of finance the concept of exchange rate is also called foreign exchange rate, EX rate and forex rate. It is basically a representation of the currency in one country in terms of another currency. Thus when we say that one British pound is eighty Indian rupees we mean that in terms of Indian currency a British pound is equal to eighty. The foreign exchange market or the forex market, as it is also known, is among the largest financial markets in operation. By estimation, this market sees a daily trade volume of three billion US dollars each and everyday.
The term spot exchange rate is used to refer to the exchange rate that is functional at the present time. The term forward rate is used to mean an exchange rate which gets quoted, as well as, traded at the present but is delivered or paid at a later date that is specified. The quotations are an important part of the exchange rates. The quotation is normally provided by giving the number of term or price currency that may be purchased by using a single unit of a unit currency, which is also called the base currency in financial lexicon.
In the foreign exchange market there is a particular rule, which is used in order to decide the base and the term currencies. As far as most of the foreign exchange markets of the world are concerned the following order is adhered to – Euro – Great Britain pound – Australian dollar – United States dollar. This means that if a conversion is being done from a Euro to an Australian dollar, Euro would be the base currency. In this case the exchange rate would be indicative of the amount of Australian dollars that would be needed to buy a Euro.
In some of the foreign exchange markets of the United Kingdom the order is a little bit different. In these markets the Great Britain pound serves as the base currency and the Euro is the term currency. In case, two currencies are not listed at a particular foreign exchange market, there is a certain market rule that is used to determine which one is the base currency. The currency that provides an exchange rate of more than 1.000 is specified as the base currency in this case.
Direct quotation is the process whereby the home currency of a particular country is quoted as the price currency. This is a common practice throughout almost all the countries of the world. Indirect quotation is a process whereby the home currency of a country is used as the unit currency. This is a common practice in the Eurozone, British newspapers, New Zealand and Australia.
