Exchange rate
Exchange rates can be understood as a sentence:
In the exchange rate scenario, rate = "1 per unit base currency and how much currency"
This figure is then extended to a set of roles: pricing, settlement, arbitrage, risk management, macro signals, etc。
Let's split up。
Rate: what is the price
In the foreign exchange market, any currency against a quote is actually a rate:
And for example:
Three key points:
BCase currency (basic currency): quote currency (value currency) written in the front (eur / usd): meaning of usd late in the back (eur / usd): 1 unit bQuote currency
So, "rate up / down" essentially means:
BPlease be more expensive。
Ii. Straight discs under a local currency perspective / crossboards with rate
From the point of view of a particular country (or trader), rate also decided that “you are used to price expression”:
Directquote
Price in local currency for 1 unit of foreign currency
Example: common in china: usd/cny = 7. 20
Meaning: us$ 1. 00
Here's rate = 7. 20
Indirect bid (indirect quote)
Prices in foreign currency for “1 unit currency”
Cny/usd = 0. 1389
Cross rate
If you know eur/usd and usd/jpy, you can count eur/jpy:
Eur/jpy rate=eur/usdxusd/jpy
In fact, these rate decided:
Iii. Several core types of exchange rates
For traders:
Real vs nominal rate
Nominal rate: the number on the market screen; real exchange rate: “purchasing power rate” after taking into account the price levels of the two countries。
For a trader like you, the real exchange rate is more used in macro studies to determine:
The role of rate at the micro level (transaction and pricing)
From a trader's point of view, the exchange rate, rate, directly determined your results at least three key points:
1. Decides on your actual gains and losses (base currency perspective)
If your financial base is rmb, but you make dollar assets (e. G. Wti crude oil, standard 500 index), then:
♪ your final gain ♪
Increase or decline in dollar assets per se x exchange rate late change (usd/cny)
A simple example:
So:
Rate changes directly to your policy performance curve in local currency (net, retreat, sharp)。
2. Decision on derivative pricing and carry costs
In fx derivatives, cross-currency transactions, rate is the core variable in the pricing formula。
If you use the renminbi as the basis for holding large commodities in united states dollars, then:
3. Determination of your exchange rate risk exposure
As long as your assets and liabilities are not in the same currency, you must have the rate risk:
Rate's role here is:
Make your opening visible with a number that can be quantified
"what kind of currency do you bet?"。
Then you can consider:
The role of rate in macro and asset allocation
On a higher level, the exchange rate, rate, is also a macro-price signal, which conveys the following messages:
Relatively weak currencies and capital flows to the united states dollar have continued to grow: they often mean a return of global capital to the united states, making risk-free asset returns more attractive; and large devaluations of emerging market currencies: often mixed with capital outflows and rising risk aversion. Impact on commodity price hubs
Large commodities are usually denominated in united states dollars:
The united states dollar depreciated:
For those of you who are able to do this, colorful, black futures, the exchange rate, rate, is a slow variable driver behind the centre of commodity prices, and although it may be inundated with demand and emotion in the short term, it is critical in the medium to long term。
Cross-market, cross-currency asset allocation
When you put the money in:
=
Increase or fall in assets per se + variations in rate
In the long-term asset allocation assessment, rate was the variable that had to go into the model。
If you are summed up as a “working definition”
Summarizing these above, a working definition of a trader's perspective can be given to rate in the exchange rate context:
In the exchange rate scenario, rate is "the price of the unit base currency versus the value currency."
On the one hand, it's you who buy and sell money and settle instant prices for cross-currency assets
The other is the combination of interest rates, macro-flow flows and national credit in the market。
For traders, it also determines:
Your true surplus or loss
Pricing cross-market assets and carry costs
You take the exchange rate risk size and direction。
