If you’ve ever traveled or done business overseas you’ve almost definitely done currency exchange in past times. Are you aware that you could have your very own foreign exchange bank a/c and change your cash online at rates far better than your bank provides you with ?
Here we explain to you how you can target an exchange rate for your foreign exchange just like a professional Currency trader, so that you receive the best possible rate, and we get you through each of the basics you must know about currencies and dealer quotes.
When you initially begin to cope with foreign currencies a number of the terminology could be confusing, along with the way all works, so let’s try to really make it much clearer.
A currency is just the kind of money which happens to be accepted as legal tender in almost any particular country. E.g. in the usa it’s the US Dollar, in the UK it’s the excellent British Pound, and then in the 16 countries of your Euro Zone (e.g. France, Germany, Italy, Spain etc) it’s the Euro.
Most of these currencies are “floating” against one another within the international money markets and may rise and fall in value relative to each other, usually because of events in international business.
In running a business terminology foreign currency is referred to as Forex or FX in short. From the forex markets each currency is well known by way of a unique 3 letter abbreviation. Those that you will likely see usually are the following;
USD U . S . Dollar
GBP Great British Pound
JPY Japanese Yen
CAD Canadian Dollar
AUD Australian Dollar
CHF Swiss Franc
SGD Singapore Dollar
NZD New Zealand Dollar
ZAR South African Rand
Forex rates (Changing money from one currency into another)
To begin with to understand how forex rates are quoted and the things they mean, let’s start by checking out a forex transaction you will likely have done at some stage in your daily life.
Whenever you conduct an overseas exchange transaction (e.g. sending money for your folks home) the dealer you conduct the transaction through will show the value of one currency against another expressed being a BUY rate within a currency pair.
E.g. GBP/USD 1.6543. This exchange rate means that 1 GBP (British pound) will buy $1.6543
Don’t be confused by how many digits appear right after the decimal point. This simply enables huge transactions.
So, for instance if you are a UK tourist contemplating your holiday spending money for a visit to the usa the above rate will just mean to you personally that 1 GBP will buy you $1.65 (We’re looking purely on the forex rate here, and ignoring any fees the dealer may charge).
If you’re planning on doing a little serious spending on your journey on the US the above exchange rate ensures that 1,000 GBP will buy you $1,654.30
Hopefully that’s fairly clear and understandable. So, here you’ve been able to see the first currency shown in a currency pair is usually the base currency because pair, i.e. the pair is showing just how much 1 unit from the base currency (GBP in this particular example) may be worth in the other currency (the USD in this case).
If in your return from the trip to america, you discover that you didn’t have the ability to spend your entire US dollars and still have $1,000 left which you would like to convert back into GBP, the transaction you now might like to do is to purchase GBP by Selling the USD.
So, so you would ask your dealer for a USD/GBP buy exchange rate. i.e. for each and every 1 US dollar, the amount of British Pounds are you going to give me?
If you’re changing money in multiple currencies it’s easiest to think about all transactions in terms of Buy rates as shown above.
Once you go to a forex counter at a bank you will normally notice a display showing various exchange rates against the domestic currency of the country through which your bank branch is located. For instance, in Ny a base currency table can have buy then sell rates for those other currencies against the USD.
If your base currency table showed the rates to the JPY to become BUY 94.86 and then sell 95.01 what this means is;
For every 1 USD you hand over you can expect to buy 94.86 JPYs, and in order to convert your JPYs back in USDs you simply take advantage of the Sell rate, so for each and every 95.01 JPYs which you Target the dealer they may hand you back 1 USD.
Hopefully you may now discover why this table is said to achieve the USD as the base currency, because the rates around the table all show the relationship from the foreign currency (within this example the JPY Japanese Yen) to 1 USD.
You are able to hopefully also observe how this table would actually just be useful for individuals that are merely ever selling and buying simply the USD against other currencies.
By way of example, it will be of only limited use to mention an Australian business woman who maybe would like to sell Australian dollars (AUDs) in order to purchase goods in the usa with USDs, but who receives payment for her services to her Japanese clients in JPYs, and from her local clients in AUDs, and who has to pay her local staff in AUDs, and who wants to incorporate some EUROs in their pocket on her behalf business trips to Europe !
In their particular life she doesn’t genuinely have a single base currency, as she receives her income in Japanese Yens and Australian Dollars, and spends cash in AUDs, USDs and EURs.