Exchange Rate

Every independent country has a national currency in its economy, and the prices of these national currencies relative to each other are determined. The price of one country currency in terms of another country’s currency is called the exchange rate. The exchange rate is the specific term for the price of foreign currency in foreign exchange transactions. If it is assumed that there are “n” national money currencies in the world, the number of exchange rates is;

n(n-1)/2 in total. Since a pair of exchange rates such as T/$ and $/T is calculated for each national currency, the total number of rates, which is n(n-1), is divided by two to eliminate double counting.

The determination by a finance institution of a buying or selling price for a financial instrument is called quotation. In the foreign exchange market, there are two methods of exchange rate quotation: direct and indirect.

• Direct (direct) quotation defines the exchange rate as the price of one unit of foreign currency in terms of the national currency. This is also known as European-style quotation.

1$ = ₺ 4.80 This expression represents direct quotation. According to this definition, one dollar is worth 4.80 TL. In this case, when the exchange rate increases, the national currency has lost value relative to the foreign currency (or the foreign currency has gained value against the national currency).

• Indirect (indirect) quotation defines the exchange rate as the price of one unit of the national currency in terms of foreign currency. This is known as American-style quotation.

The expression 1$ = ₺ 4.80 = 0.20$ represents indirect quotation. According to this definition, one TL is equal to 1/4.80 or 0.20 dollars. In this case, when the exchange rate increases, the national currency has gained value relative to the foreign currency (or the foreign currency has lost value against the national currency).