Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 1: Principles of financial trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 2: Principles of Financial Planning and Cash Flow in Financial Trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 3: Understanding financial trading techniques

EXCHANGE RATES

Most countries use different types of money or currency. Like most other rates in economics, the exchange rate is essentially a price and can be analysed in the same way we would a price. The exchange rate is price at which one currency I convertible into another.

If £1 buys 4 Mars bars in a supermarket, the pound to Mars bars exchange rate is 4. The Mars bar to pound exchange rate is 0.25, simply the reciprocal ¼.

On the September 11th 2016 the US dollar to Japanese Yen exchange rate was 102.69, this means that $1 USD will purchase you 102.69 Yen. So the Japan to US Dollar exchange rate = 1 USD / to Japan exchange rate or Japan to US exchange rate = 1/102.69 = 0.0097. (Divide 1 by 102.69).

Exchange rates may be fixed which means the currency does not fluctuate against other currencies. Exchange rates may be float which means they fluctuate with the relative supply and demand for various currencies on the world’s foreign exchange markets. (FX).

Why do floating exchange rates fluctuate? This is generally because anything that would significantly affect the supply of and demand for, a particular currency will affect its exchange rate.Supply & Demand

Justification of upward sloping supply and downward sloping demand curves comes from the buying and selling of currency for export and import payments. Companies (export creates demand for currency and import creates supply), foreign investors, speculators and central banks cause supply and demand changes in currency.

In modern FX markets speculation is the single most determinant of the minute to minute price of currency. In other words, his foreign exchange trading is vastly more than would be needed to finance foreign investment in the US, even if foreigners were to buy all the stocks of US firms. About 80% of forex trading is speculative, with the other 20% financing international trade or productive investment. In long term perspectives it is likely that exchange rates are largely determined by economic fundamentals i.e. exports, imports and long term capital movement.

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