While modern currency is physically represented by coins and paper bills, most large-scale currency transactions are done electronically. Before fiat money existed, currencies were usually backed by a commodity such as gold or silver. The value of these currencies is backed by the promise of their issuing governments, which makes them fiat money (currency declared by the government to be an official medium of payment but is not backed by a physical commodity). Major currencies in the world today take on the physical form of paper bills or coins which are easily carried on a person, but most of a person's currency is typically stored in digital accounts. Modern currency is much more uniform and regulated. Paper currency, on the other hand, was invented in Asia and was brought back to Europe by Marco Polo after his travels to Asia. For practical reasons, Lydian currency took on the form of a round coin, which became the first ever standardized unit of currency. The first "official" currency was minted in the seventh century BC by King Alyattes of Lydia in modern-day Turkey. Some examples include coins, barley, gold, silver, squirrel pelts, 8-ton carved limestone rocks, salt, knives, cowrie shells, stamps, potato mashers, peppercorn, tea bricks, and cheese.Īs history has shown, anything that a group of people in an economy attaches value to can be used as currency.
Throughout history, currency has taken many different forms. Before this, it is assumed that bartering, which is the exchange of goods and services without the use of money, was likely used. What is Currency?Ĭurrency is a universal medium of exchange for goods and services in an economy, and it is believed to have been used as such dating back at least 3,000 years. The USD in a currency pair with any of the others is known as a major currency pair. dollar (USD), Euro (EUR), Japanese yen (JPY), British pound (GBP), Australian dollar (AUD), Canadian dollar (CAD), and the Swiss franc (CHF). Major Currencies-This refers to a short list of the most traded currencies, which generally stay the same year-to-year.
Interbank (bank-to-bank) Rate-This is the wholesale exchange rate that banks use between themselves. The first currency in a currency pair is called the base currency, while the second is called the quote currency. A pip is sometimes called a point.Ĭurrency Pair-A quote of the relative value of one currency unit against another currency unit.
For example, 3 pips are the difference between the currency quote of EUR/USD 1.2800/1.2803. Pip-A pip is the smallest unit of value in a bid-ask spread. Some call this profit a fee or commission. As financial middlemen, most will set exchange rates of their own at bid-ask spreads that return a percentage as profit for doing business. Real-world currency exchanges with brokers, banks, or businesses typically do not follow precise market rates. Theoretically, buyers want the smallest possible spreads, while sellers want the highest spreads. The forex is able to facilitate the receipt or payment of units of currency that are equal in value.īid Price-The price that a buyer is willing to pay for a unit of currency.Īsk Price-The price that a seller is willing to accept for a unit of currency.īid-Ask Spread-The difference between the bid and ask price. This market is a necessity because one unit of currency very rarely equals exactly one unit of another currency. Below is a short list of some of the important terms pertinent to foreign currency exchange.Įxchange Rate-The value of one currency expressed in terms of another.įorex-The foreign exchange market (forex) is a global, decentralized, over-the-counter market for the trading of currencies and is the largest market in the world (followed by the credit market).
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