What are Foreign Currency Exchange Rates?

Let me start with a definition of foreign currency exchange rates. Foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency.

Let us take an example, if you go to USA on vacation, you will have to pay for your hotel, meals, admissions fees, souvenirs and other expenses in US Dollars. Since your money is all in British Pounds, you will have to sell some of your British Pounds to buy Dollars. Similarly if you were living in Switzerland and planned a vacation in the United States, you will have to buy US dollars with Swiss Francs (You have to sell Swiss Francs).

You can convert the exchange rate for buying a currency to the exchange rate for selling a currency, and vice versa, by dividing 1 by the known rate. For example, if the exchange rate was 1.400, how many U.S. dollars would you get for your 1,000 Euros? You would receive US $1,400.00 for your 1,000 Euros.

In other words, one divided by .5988 equals 1.6700. Similarly, if the exchange rate for buying US dollars with British pounds is 1.6700, the exchange rate for buying British pounds with US dollars is .5988 (or one divided by 1.78536 equals .56011). This is how newspapers often report currency exchange rates.

You should know, however, that you will not receive the price quoted in the newspaper if you trade forex. That’s because banks and other market participants make money by selling the currency to customers for more than they paid to buy it and by buying the currency from customers for less than they will receive when they sell it. This difference is called a spread and we’ll talk more about spreads later in this blog.

As you can see, currency exchange rates fluctuate. Retail customers who trade in the forex market hope to profit from those fluctuations.