How FX rates are calculated

Keyword - FX rates
Currencies are considered as the backbone of the economy. It is quite similar to the prices
of gold, silver and other commodity which represent the worth. Currencies are provided
prices which represent their price. The FX rates play an important role in the currencies
exchange. The rates are determined by the free interplay of demand and supply forces.
Forex trading can be defined as a class of investment where an investor tries to speculate
on the future movements of various FX exchange rates. FX rates come in pairs where the
currency of one country is evaluated in terms of another country. FX rates affect both the
consumers and producers because of the fact that the economy is engaged in the world
trade.
Calculation of the FX rates
The FX rates are determined by the free interplay of demand and supply forces and the
rates are established by measuring one currency in terms of another. For example if an
American wants to travel to Italy then the conversion needs to be done. If it is seen that
the cost of 1.34 US Dollar is equivalent to one euro then the exchange rate between the
two currencies can be written as 1.34$/Euro.
In case of forex rates the currencies pairs are flipped during the time of quotation hence
the above equation or quote can be written as 1.3400 EUR/USD. It implies that the
1.3400 of the bottom currency (USD) which is the counter currency to get 1 of the top
currency (Euro) which is the base currency.
Supply and Demand
The prices of goods, commodities and the FX rates are determined by the free interplay
of demand and supply forces. The exchange rates are based on supply and demand. The
demand and supply is based on certain pre defined facts:
It is seen that high supply causes low prices as the supply is in abundance on the
contrary when there is high demand the prices are also high.
In case of an abundant supply of a particular commodity the price tends to fall
When there occurs scarcity of a commodity or currency the price is bound to
increase.
Therefore it is seen that when there is an increase in demand fo a commodity or
the currency then the appreciation takes place on the other hand when there is an increase
in supply then depreciation is bound to occur

In case of international market when investors are selling a particular currency they are
making it more available in the market and thus increasing its supply. If there are not
sufficient buyers for it then the prices will go down and hence new FX rates would come
into picture.
Therefore the direction of the currency goes with the FX rates and which is determined
by the prevailing market conditions.

FX rates are vital in the course of international trade and hence the equilibrium of the
currencies depends on it.