Intro to Forex, Basis points, and forex markets
A foreign exchange rate is the rate in which one currency is valued in relation to a currency of a foreign entity. In other words, it is the amount or quantity of one currency that is required to buy or sell one unit of the other currency.
Commonly there are two methods in expressing a foreign exchange rate. The first, and more widely used method in expressing the amount of any currency that will be required to buy one U.S. dollar.
To sample, a quotation for foreign currency exchange transaction stated in the form USD/PHP at 50 will mean that one (1) U.S. dollar can have the capacity to be exchanged for fifty (50 units) of Philippine Peso. The second, but less common way of valuing foreign exchange rates is by simply applying the reverse of the first method.
In the second method, the foreign exchange rate will be stated in terms of the US dollar amount that can be exchanged for one (1) unit of foreign currency. Example, a foreign exchange value of PHP/US at 0.02 means that one Canadian dollar can be exchanged for one (1) unit U.S. dollars .
In some instances where the foreign currencies instead are used to state a foreign exchange rate, a special rating called a "cross rate" is used as an alterantive. It is done to express the currency values relative between the two currencies . For example the value PHP/HKD at 7 means that Seven (7) Philippine Peso can be exchanged for 1 Hong Kong Dollar.
Foreign Exchange Rates are generally expressed in the whole number format followed by 2 to four decimal points according to materiality of the decimals (if material might as well include the relevant figures). Each subtle increase in te decimal is called a basis point (apply if using 4 decimals), 0.0001 is called a basis point. Therefore, an exchange rate that goes from 1.500 to 1.600, the currency is said to have changed by 100 basis points.
To have idle cash invested in foreign countries or in buying foreign products, the firms and individuals may first need to have access to the local currency of the foreign country with which they intend to contract with. Furthermore, exporters may demand to be paid for their goods and services either in their local currency or in U.S. dollars, which are accepted worldwide.
The Foreign Exchange Market, or "Forex" market, is mostly where the buying and selling of world currencies are taking place. The Forex market up to date the largest financial market worldwide with trading volumes exceeding USD 1.5 trillion on some instances. Very large commercial banks are the major traders in this market.