With the Wallstreet journals full of the articles on what’s going on in the fx trade, you probably would be wondering how does this market function. The traders and investors that make money out of the forex trade typically earn margins over the exchange rate.
What Is Foreign Exchange Rate?
The relative value of a currency with respect to another is known as the foreign exchange rate. For example, the value of a US Dollar against EUR will be the exchange rate for the US Dollar to EUR.
What Is Margin Rate?
An exchange broker or a bank levies charges over the currency exchanged. The difference between the exchange value and the amount paid by a customer is known as the margin rate. This could be better understood by an example. Let’s assume that 1 USD = 0.90008 EUR. the bank or exchange broker will offer you 1 USD = 0.90000 EUR. So the difference that the broker or the bank will earn, i.e. 0.00008 EUR is the margin rate. A Corporate FX firm will be better able to understand this for you in case you’re confused.
What Affects The Value of Currency?
The value of a currency is determined by the amount of currency that flows in and out of a country. Higher demand for currency would usually mean that the currency’s value would increase. You may ask that if the demand for currency would increase it’s value then what are the drivers that affect the demand of the currency? Considering the various modes of expenses, a currency exchange would be driven by tourism, international trade, acquisitions and mergers, gold held by the country, and a lot more. Out of these, tourism and international trade are the key drivers.
It is wiser to check the trend, a particular country is following before making any investment. For more information on how investments work, please visit http://forexprofitway.com/ to get an insight into the forex trading.
An international tourist would require to exchange their currency for expenditure in another country. This would initiate an exchange of currency and would eventually result in an increase in the demand of the currency. Likewise, international trade would require an exchange in the currency and increase in demand for the currency. As already established that demand is directly proportional to the value of the currency, this would eventually change the rate of exchange for the country.
Apart from these, the difference in the interest rates in different countries have the greatest impact on the value of currencies. An investor would typically incline towards safety with the highest yields. For example, if the rate of interest for investing in Canada is 8.5% and that for expending in Japan is 0.1%, then an investor would buy Japanese Yen and deposit that money in a bank in Canada. This would, in fact, increase the value of the Canadian Dollar and not that of Japanese Yen.
The forex trade thrives on margins and exchange rates. The market is open 24×7 as if one country does not trade at night then some other would. This implies that the forex market keeps on fluctuating throughout the day and the night. Needless to say, a trader can trade at any time.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.