If you’ve ever traveled or done business overseas you’ve almost certainly done exchange rate previously. Do you know that you might have your personal foreign currency bank a/c and change your money online at rates much better than your bank will provide you with ?
Here we reveal to you how you can target an exchange rate for your foreign exchange as being a professional Currency trader, in order that you get the very best possible rate, therefore we help you get through all the basics you should know about currencies and dealer quotes.
When you first begin to deal with foreign currencies a number of the terminology might be confusing, in addition to the way it all works, so let’s try so it will be much clearer.
A currency is just the form of money which happens to be accepted as legal tender in virtually any particular country. E.g. in america it’s the usa Dollar, in the UK it’s the truly amazing British Pound, and in the 16 countries from the Euro Zone (e.g. France, Germany, Italy, Spain etc) it’s the Euro.
Every one of these currencies are “floating” against one another in the international money markets and can rise and fall in value relative to one another, usually due to events in international business.
In business terminology foreign exchange is known as Forex or FX in short. From the foreign exchange markets each currency is recognized with a unique 3 letter abbreviation. Those which you are likely to see in most cases are the following;
USD Usa 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
Foreign Exchange rates (Changing money from one currency into another)
To begin with to understand how forex trading rates are quoted and what they mean, let’s start with looking at a forex transaction you will likely have done at some stage in your way of life.
When you conduct an international exchange transaction (e.g. sending money to your folks home) the dealer you conduct the transaction through will show the need for one currency against another expressed like 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 just how many digits appear once the decimal point. This simply permits very large transactions.
So, for instance if you are a UK tourist contemplating your holiday spending money for a visit to america these rate will just mean to you that 1 GBP will buy you $1.65 (We’re looking purely on the foreign currency exchange rate here, and ignoring any fees the dealer may charge).
If you’re intending on doing a little serious spending on your holiday on the US the above exchange rate signifies that one thousand GBP will buy you $1,654.30
Hopefully that’s fairly clear and understandable. So, here you’ve been able to see how the first currency shown in a currency pair is definitely the base currency in that pair, i.e. the pair is showing simply how much 1 unit of your base currency (GBP in this example) is definitely worth inside the other currency (the USD in this case).
If in your return from your trip to the usa, you discover that you didn’t manage to spend your US dollars and still have $1,000 left which you want to convert back in GBP, the transaction you now want to do is to purchase GBP by Selling the USD.
So, so you would ask your dealer for the USD/GBP buy exchange rate. i.e. for each 1 US dollar, the number of British Pounds are you going to deliver?
If you’re changing funds in multiple currencies it’s easiest to think of all transactions regarding Buy rates as shown above.
If you go to a forex trading counter with a bank you are going to normally visit a display showing various exchange rates up against the domestic currency of the country where your bank branch is located. As an example, in New York a base currency table can have buy then sell rates for many other currencies versus the USD.
If your base currency table showed the rates for the JPY to be BUY 94.86 and then sell on 95.01 this implies;
For every 1 USD you give you will buy 94.86 JPYs, and if you wish to convert your JPYs back into USDs you only use the Sell rate, so for each 95.01 JPYs that you simply Target the dealer they will likely hand you back 1 USD.
Hopefully now you can discover why this table is claimed to have the USD as its base currency, since the rates around the table all show your relationship of the foreign exchange (in this particular example the JPY Japanese Yen) to 1 USD.
You may hopefully also see how this table would actually basically be useful for people who are only ever selling and buying just the USD against other currencies.
As an example, it could be of just limited use to mention an Australian business woman who maybe would like to sell Australian dollars (AUDs) as a way to purchase goods in america with USDs, but who receives payment on her services to her Japanese clients in JPYs, and from her local clients in AUDs, and who must pay her local staff in AUDs, and who wants to possess some EUROs in the pocket on her behalf business trips to Europe !
In her particular life she doesn’t actually have one base currency, as she receives her income in Japanese Yens and Australian Dollars, and spends money in AUDs, USDs and EURs.