In the study and practice of exchange rates, we often encounter different types of exchange rates. Understanding the classification of these exchange rates not only helps us comprehend the operational mechanism of the foreign exchange market but also enables us to make more informed decisions in actual transactions. This article will systematically introduce several common classification methods of exchange rates.
Buying exchange rate
and selling exchange rate
Buying exchange rate and selling exchange rate
The most basic classification method in foreign exchange trading
The buying exchange rate refers to the exchange rate used by banks when purchasing foreign exchange,It is the price at which the client sells foreign exchange.
USD1=CNY6.3231~6.329
The selling exchange rate is the exchange rate used by banks when selling foreign exchange,It is the price at which the customer buys foreign exchange.
USD1=CNY6.3231/96
The difference between the buying exchange rate and the selling exchange rate is called "bid-ask spread"
Typically, the selling exchange rate is higher than the buying exchange rate, and the difference between the two represents the bank's profit.
For example, in the foreign exchange quotation of Bank of China on March 1, 2018, we can see that the "spot exchange buying price" is higher than the "cash buying price". This is because banks need to bear the costs of custody, transportation, etc. when handling cash, so the cash buying price is usually lower than the spot exchange buying price.
Basic exchange rate
and cross-rate
The basic exchange rate refers to the exchange rate between the domestic currency and the key currency. The key currency typically refers to the currency that has the closest relationship with the country's foreign exchanges, and most countries use the US dollar as the key currency. Therefore, most countries use the exchange rate between the domestic currency and the US dollar as the basic exchange rate.
The cross-rate, also known as the cross-exchange rate, refers to the exchange rate between the local currency and a non-key currency calculated based on the basic exchange rate.
For example, if the basic exchange rate of RMB against USD and the exchange rate of USD against JPY are known, the cross exchange rate of RMB against JPY can be calculated.
The basic exchange rate between the Renminbi and the US dollar, set by our country on a certain day, is: USD1=CNY6.5788
The exchange rate of the pound against the dollar in the London foreign exchange market is: GBP1=USD1.6006
The exchange rate between RMB and GBP can be calculated as:
GBP1=CNY(1.6006*6.5788)=CNY10.530
Exchange rates for
telegraphic transfer,
mail transfer, and demand draft
T/T Rate - The exchange rate used by banks when instructing their foreign branches to make payments to customers via telegram or telex. Due to the speed and high security of T/T, the T/T rate is usually higher.
Mail Transfer Rate (M/T Rate) - The exchange rate used by banks when instructing foreign branches to make payments to customers via mail. Due to the slower speed of mail transfer, the exchange rate is lower than that of telegraphic transfer.
Documentary exchange rate (D/D Rate) - The exchange rate used by banks when trading foreign exchange through documentary exchange. Banks issue sight or forward drafts, which are carried abroad by the remitter or sent to the payee, and the payment is made against the presentation of the draft.
Spot exchange rate
and forward exchange rate
Spot exchange rate and forward exchange rate are classified based on the delivery time of foreign exchange transactions. Delivery refers to the act of both the buyer and the seller fulfilling the transaction contract and settling the payment and goods.
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