Determining foreign exchange rates. As I ve already mentioned the prices of foreign currencies expressed in terms of other currencies are called foreign exchange rates.
There are today three markets for foreign exchange the spot market, which deals in currency for immediate delivery the forward market, which involves the future delivery of foreign currency and the currency futures and options market, which deals in contracts to hedge against future changes in foreign exchange rates. Immediate delivery is defined as one or two business days for most transactions. Future delivery typically means one, three, or six months from today.
Dealers and brokers in foreign exchange actually set not one, but two, exchange rates for each pair of currencies. That is, each trader sets a bid buy price and an asked sell price. The dealer makes a profit on the spread between the bid and asked price, although that spread is normally very small. 2.