Tuesday, May 5, 2009

Forex Quotes

Reading Forex quotes is simple though it looks slightly puzzling at the start.

Foreign Currency Quotes
Quoting currencies are always done in pairs. Each pair of currencies represents a single product and conventionally noted MMM/NNN, where NNN is the currency's ISO 4217 international three-letter code which express the price of one unit of currency NNN.

The 'base currency' is the first currency in the quotes.

For instance EUR/USD, GBP/AUD, and USD/JPY, in such cases, Euro Dollar, Britain Pound and USD are acting as the base currency. Base currency in a Forex quote will constantly has a value of 1. EUR/USD indicates how much United States Dollar you can buy with 1 Euro Dollar; likewise USD/GBP indicates the exchange rate of Great Britain Pound with 1 US Dollar.

Bid/Ask and Spread
Sometimes there is only observe a single price but frequently exchange rates are shown in pairs with 'bid and ask’ price.

For instance GBP/AUD 2.0265/2.0270, 2.0265 is called the bid price, while 2.0270 is the ask price. Bid price is the price that you sell the base currency which is GBP in our case here; ask price is the price that you can buy the base currency. 'Spread' is difference between the bidding and the asking price.

You may observe that ask price is always higher than the bid price. The difference of the bid-ask price makes the income of currency brokers without charging commissions to their clients.

The pip

The pip is the smallest value in a Forex quote. In our preceeding example for GBP/AUD. If the exchange rate increases to 2.0266 from 2.0265, that's a one pip difference. In other words, a pip is the last decimal place of the quotation.

Every currency has its own pip value. For example, USD/JPY rate at 121.65, a pip would be 0.01, while for EUR/USD 1.2465, a pip would be 0.0001.

Example of Forex Quotes

GBP/USD 1.7500/1.7520
• Base currency= GBP
• Bid price= 1.7500; Ask price= 1.7520
• When selling Pound, 1 Pound = USD$1.7500; when buying Pound, USD$1.7520 = 1 Pound.
• Spread = | 1.7500 - 1.7520 | = 0.0020
• Pip value= 0.0001

EUR/JPY 128.00/128.15
• Base currency= Eur
• Bid price= 128.00; Ask price= 128.15
• When selling Euros, 1 Euro = JPY128.00; when buying Euros, JPY128.15 = 1 Euro.
• Spread = | 128.00 - 128.15 | = 0.15
• Pip value= 0.01

EUR/USD 1.2370/1.2380
• Base currency= Eur
• Bid price= 1.2370; Ask price= 1.2380
• When selling Euros, 1 Euro = USD$1.2370; when buying Euros, USD$1.2380 = 1 Euro.
• Spread = | 1.2370 - 1.2380 | = 0.0010
• Pip value= 0.0001

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