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In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency. Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers, and where currency trading is continuous: 24 hours a day except weekends, i. 20:15 GMT on Sunday until 22:00 GMT Friday. In the retail currency exchange market, different buying and selling rates will be quoted by money dealers.
Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency. Currency for international travel and cross-border payments is predominantly purchased from banks, foreign exchange brokerages and various forms of bureaux de change. These retail outlets source currency from the inter-bank markets, which are valued by the Bank for International Settlements at 5. There is a market convention that determines which is the fixed currency and which is the variable currency. Accordingly, in a conversion from EUR to AUD, EUR is the fixed currency, AUD is the variable currency and the exchange rate indicates how many Australian dollars would be paid or received for 1 Euro. In some areas of Europe and in the retail market in the United Kingdom, EUR and GBP are reversed so that GBP is quoted as the fixed currency to the euro.
This reduces rounding issues and the need to use excessive numbers of decimal places. 00 in the Eurozone and is used in most countries. Conversely, if the foreign currency is strengthening and the home currency is depreciating, the exchange rate number increases. Market convention from the early 1980s to 2006 was that most currency pairs were quoted to four decimal places for spot transactions and up to six decimal places for forward outrights or swaps. An exception to this was exchange rates with a value of less than 1.
000 which were usually quoted to five or six decimal places. In 2005, Barclays Capital broke with convention by quoting spot exchange rates with five or six decimal places on their electronic dealing platform. Each country determines the exchange rate regime that will apply to its currency. If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. Still, some governments strive to keep their currency within a narrow range.
As a result, currencies become over-valued or under-valued, leading to excessive trade deficits or surpluses. In general, the exchange rate where the foreign currency is converted to a smaller number of domestic currencies is the buying rate, which indicates how much the country’s currency is required to buy a certain amount of foreign exchange. Selling rate: Also known as the foreign exchange selling price, it refers to the exchange rate used by the bank to sell foreign exchange to customers. It indicates how much the country’s currency needs to be recovered if the bank sells a certain amount of foreign exchange.