When currencies can be bought and sold in the FX markets, banks quote exchange rates at which they will deal. Exchange rates are quoted as a number of units of one currency (the variable currency) in exchange for one unit of the other currency (the base currency). For example, the sterling/US dollar exchange rate (GBP/USD) might be 1.8150, meaning that each £1 can be exchanged for US$1.8150 in the market.
Experience has shown that exchange rates can be very volatile. Volatility means that exchange rates can move up or down by large amounts, within a fairly short period of time.
· The exchange rate between British pound and the US dollar has also been volatile, ranging in fairly recent times between about US$1 to £1 to over US$2 to £1.
Exchange rate volatility creates forex risk (also called currency risk and FX risk) for anyone involved in buying, selling, borrowing or investing foreign currency.
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