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September 08, 2016 | 14:30 | Dubai
A trip to the bank or currency exchange is often met by a screen flashing the movement of a host of currencies resembling what is displayed above. Here we try and simplify the same to aid understanding of what is otherwise a relatively complicated quote to get one’s mind across, even for seasoned finance professionals.
When a currency is quoted, it is done in relation to another currency – simple, the value of one currency is reflected through the value of another. In the case above, the value of the AED (UAE Dirham) is reflected by the value of the INR (Indian Rupee). Here, 1 dirham translates to an equivalent of INR 18.08.
This is referred to as a currency pair.
So, the next time you see a newspaper headline as AED/INR has moved to 18.10, you know 1 dirham can now fetch you 18.10 Indian rupees. In this case, the rupee has weakened and the dirham has strengthened as you now can purchase more rupees with the same dirham. As an Indian national, working in the UAE, higher the weakness in the Indian rupee or the strength of the dirham, better is the rate you could avail on your next remittance.
Another closely related concept is that of Bid and Ask, which is another ticker on the screen you would have seen.
Consider an Indian traveler to the UAE; she sees the following price on for dirhams at the airport exchange kiosk:
The higher price, i.e. INR 18.50 is the price that the exchange is asking per dirham. Since the traveler wishes to buy AED 1,000, she would have to pay the dealer INR 18,050.
The next traveler in line has just finished his Dubai vacation and before boarding his flight back to the India, wants to sell the 1000 dirhams he has left over. He would sell the dirhams to the exchange dealer at the bid price of INR 18.00, and would thus receive INR 18,000 for his dirhams. The difference, in this case, INR 50 arising from these two transactions represents the dealer’s profit. This arises from the bid-ask spread (BID refers to the price at which the dealer would BUY; and ASK refers to the price at which the dealer would sell the base currency).