What is Currency Exchange?
Currency exchange is a financial institution that has the right legally to exchange one currency for another currency to its customers. It can also be a standalone business or part of a services offered by a bank or financial institution. Currency exchange makes its dividend from services either through fine-tuning the exchange rate or taking a commission. It is also called foreign exchange market and bureau de change. The exchange rate quoted by a currency exchange are typically close to the forex rate, although the exchange will make changes to the rate to ensure that it makes profit on the transaction, this is due to the fact that the transaction is not depending on the profit that the exchange wats to make. Consumers may find out that it is less expensive to incur credit card fees at the foreign destination, rather than use the exchange services ahead of time.
What is Forex Rate?
Forex rate is the prevailing rate at which a currency pair can be purchased or sold. Forex rate differs from the forward rate because it prices the worth of the currencies compared to foreign currencies today. It is used by most traders when trading with an online forex broker.
Forex rate is the most frequent transaction in the forex market. The global market have a daily turnover of more than $5 trillion, which makes it larger than both the equity and bond market. The normal delivery time is T + 2 days, which is where there is no adjustment for interest rate differentials. If a counter party wish to delay delivery, they will have to take out a forward contract. For instance, if an AUD/USD trade is carried out at 1.1550, this will be the rate at which the currencies are swapped on the spot date. However, if the European interest rate are diminished than they are in the U.S, this rate will be adjusted higher to the account for this difference. If the counterparty also decides to own the AUD and short the USD for a certain period of time, it will also cost more than the spot rate. A lot of currencies have shorter spot days such as USD/CAD and USD/TRY.
Although the forex rate calls for delivery withintwo days, this do not occur in trading community. Traders who hold the position longer than two days will have their trades set to default by the broker that is closed and re-opened at the same price, prior to the two days deadline. However, when these currencies are rolled, there will be a discount attached, this depends on the difference in interest rates via the short term forex swap. Because the spot rate is the rate of delivery with no fine tuning for interest differential, the rate is quoted in the retails market.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.