It's been a long break! I hope you've been having a great time?
Psst! I am bringing you a 'delicious' series on the "Chronicles of Koffie Black".
Koffie, a young Ghanaian, bumped into Forex after being introduced to it by a friend. In the process, he lost his managerial job and encountered several other challenges and adventures in his quest for the golden fleece.
This is going to make for very interesting reading so don't miss it!!
It will be "airing" on this blog every Monday, Wednesday and Friday starting tomorrow.
So watch out!
Now, it's time for some serious education...
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| Ever Wondered How Currency Rates Are Calculated ? |
Well, I have great information with illustrations to help you. It's a little techie though....
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Direct Currency Calculation
When stocks are exchanged using different currencies and one currency is the official currency of the country where the exchange quote is given, a direct exchange can be performed.In order to perform a direct currency calculation, the following four pieces of information are required.
- Originating Currency: the three letter currency code the amount is currently in.
- Amount: a decimal that contains the number of units of Originating currency to be converted.
- Target Currency: the three letter currency code the amount will be converted to.
- Market Maker: the market maker that is being used for the current company or plan.
Steps to Perform a Direct Currency Calculation
- Retrieve the exchange rate for the Originating currency and the Target currency supplied by the current Market Maker.
- Search the AsExchangeRate table for a single instance that contains the Originating currency as either the BASE or TERMS currency, and the Target currency as either the BASE or TERMS currency, for the current Market Maker. If rows exist, get the row that has the most recent effective date.
- If no rows exist in the AsExchangeRate table for Originating and Target currency, a cross rate calculation will need to be performed.
- Retrieve the DirectTermIndicator for the current Market Maker and whatever currency is the TERMS currency from the Exchange Rate retrieved from the AsMarketMakerCurrency table.
- If DirectTermIndicator is T, then direct, or American, terms are used in the quote. The quote is the number of BASE currency units needed for one unit of the TERMS currency.
- If DirectTermsIndicator is F, then indirect, or European, terms are used in the quote. The quote is the number of TERMS currency units needed for one unit of the BASE currency.
- Perform the currency conversion calculation to get the number of units in Target currency:
- If the Target currency is the TERMS currency in the exchange rate, then the conversion is done by using the amount of Originating currency to BUY some number of BASE currency from the Market Maker. This is done using the following formula:
- If Indirect: Amount * Offer Price = Number of units of Target Currency
- If Direct: Amount / Offer Price = Number of units of Target Currency
- If the Target currency is the BASE currency in the exchange rate, then the conversion is done by using the amount of Originating currency and SELLING it for some number of TERMS currency from the Market Maker. This is done using the following formula:
- If Indirect: Amount / Bid Price = Number of units of Target currency
- If Direct: Amount * Bid Price = Number of units of Target currency
- Retrieve the CurrencyRoundPlaces and CurrencyRoundMethod values from the AsCurrency table for the Target currency and round the result. Rounding is described in detail later.
Examples of Direct Currency Calculation
Exchange Rate Indirect
Quote, USD/CAD
- BASE Currency = USD
- TERMS Currency = CAD
- OFFER = 1.0018
- BID = 1.0020
- Originating currency = USD (the BASE currency in this example)
- Target currency = CAD (the TERMS currency in this example)
- Amount = 100,000
- Currency Conversion = 100000 * 1.0018 = 100180.0000 CAN
- Originating currency = CAD (the TERMS currency in this example)
- Target currency = USD (the BASE currency in this example)
- Amount = 100,000
- Currency Conversion = 100000 / 1.0020 = 99800.3992 USD
Exchange Rate Direct
Quote, USD/CAD
- BASE Currency = USD
- TERMS Currency = CAD
- OFFER = .9985
- BID = .9982
- Originating currency = USD (the BASE currency in this example)
- Target currency = CAD (the TERMS currency in this example)
- Amount = 100,000
- Currency Conversion = 100000 / .9985 = 100150.2254 CAD
- Originating currency = CAD (the TERMS currency in this example)
- Target currency = USD (the BASE currency in this example)
- Amount = 100,000
- Currency Conversion = 100000 * .9982 = 99820 USD
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