Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers, and where currency trading is continuous: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.In the retail currency exchange market, different buying and selling rates will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency. The quoted rates will incorporate an allowance for a dealer's margin (or profit) in trading, or else the margin may be recovered in the form of a commission or in some other way. Different rates may also be quoted for cash, a documentary form or electronically. The higher rate on documentary transactions has been justified as compensating for the additional time and cost of clearing the document. On the other hand, cash is available for resale immediately, but brings security, storage, and transportation costs, and the cost of tying up capital in a stock of banknotes (bills).
Currency for international travel and cross-border payments is predominantly purchased from banks, foreign exchange brokerages and various forms of bureaux de change. These retail outlets source currency from the inter-bank markets, which are valued by the Bank for International Settlements at 5.3 trillion US dollars per day. The purchase is made at the spot contract rate. Retail customers will be charged, in the form of commission or otherwise, to cover the provider's costs and generate a profits. One form of charge is the use of an exchange rate that is less favourable than the wholesale spot rate. The difference between retail buying and selling prices is referred to as the bid-ask spread.
The retail exchange market
Each country determines the exchange rate regime that will apply to its currency. For example, the currency may be free-floating, pegged (fixed), or a hybrid.If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world.
Exchange rate regime
A market-based exchange rate will change whenever the values of either of the two component currencies change. A currency becomes more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).