Exchange rates display how much of one unit of currency can be exchanged for another unit of currency. These rates can be either floating or pegged. Floating exchange rates are the most common, and these rates depend on several economic factors. Pegged exchange rates are when a government artificially maintains a predetermined rate and it is adjusted only at certain predetermined intervals. This is most often seen in countries with emerging markets.
The exchange rate is linked to the common market forces of supply and demand. When there is an increase, say in the demand of the British pound by Americans, there is also a price increase of the pound in relation to the U.S. dollar. Interest-rate decisions, unemployment numbers and gross domestic product can all affect the exchange rate of currency.
Currency is a medium of exchange for the purchase of goods and services. Base currency is the first currency quoted in the exchange rate of a currency pair. Take GBP/USD for instance. The pound is the base currency and the dollar is the quote currency. The exchange would be how many dollars, or quote currency, are needed to purchase one pound, or one unit of base currency. Currency is traded on the foreign exchange market, also known as Forex.
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Forex is open 24 hours a day and is the most heavily traded market in the world. You can participate in the market yourself or seek the help of a broker. The exchange between the pound and the dollar on the Forex market is typically called the cable. This is because of the history of exchange rates being transmitted via the trans-Atlantic cable.
Once the basics are understood, conversion is simple and can be applied to any conversion rates. You can often find the current exchange rate from a broker, in the newspaper or online. Take an exchange rate of GBP/USD=2. This means for every two pounds you convert or trade, you would receive one U.S. dollar.