subject: INVESTIGATING DIFFERENT TYPES OF EXCHANGE RATES [print this page] The Forex market seems simple enough but the basic premise of exchanging two currencies against one another doesn't do it justice. The amount of factors that can alter your investment is staggering with spot and cross exchange rates the usual method of trading.
So what are exchange rates? Basically they are the rate of exchange of two currencies when paired off against each other. This simplicity is why the Forex market is so popular with traders yet it masks the complexity of the market. Although you are dealing with only two currencies against one another, there are over 30 currencies on the market with the major ones being the US dollar, Japanese yen, the euro used by a variety of European nations, the Swiss franc and the British pound sterling. When you buy one currency like the dollar and trade it off against the euro, you are not just worrying about those two currencies.
There are a number of factors that will affect the value of your dollar against the euro. Besides having to worry about how the economies of the United States and Europe are doing you also have to consider the world economy in general. If one of the major nations has some sort of crisis, it could affect the whole market. Perhaps the dollar will remain unscathed or maybe the euro will increase in value. These variables make the life of a Forex trader a very stressful one indeed and that's before you take into account all sorts of other market data!
Generally speaking, there are two main types of exchange rates: cross and spot. A cross rate is the rate of two currencies that are not directly quoted against one another yet they are quoted against the same currency like the dollar. It should be remembered that although there are over 30 currencies traded, there are many more worldwide that are not. So you will have a situation where two currencies will never be quoted against one another but will be against one of the major currencies. This cross rate of currencies that are not actually quoted against each other can then be calculated in terms of pounds or dollars depending on whether it is quoted against those currencies.
Spot exchange rates are the amount of currency needed to buy another currency and is the basic Forex market trade. When a trader makes a quote for a particular currency in the market, they quote it at the amount by which they will either buy or sell it per unit of base currency. So if you are interested in a euro/dollar spot trade, you would quote a rate of 1.30/32. This means that you would be willing to buy dollars at a rate of 1.30 per euro and sell at 1.32 per euro.
Regardless of what exchange rates you choose to trade in, remember that the market never stops moving at a breakneck speed so you have to be extremely fast when you make your moves. The Forex market is no place for the indecisive or faint-hearted.
