If you’ve ever traveled or done business overseas you’ve more than likely done currency exchange before. Were you aware that you may have your very own foreign exchange bank a/c and change your hard earned dollars online at rates much better than your bank will give you ?
Here we explain to you the best way to target an exchange rate for your foreign exchange as being a professional Fx trader, so you get the very best possible rate, therefore we get you through all of the basics you need to know about currencies and dealer quotes.
When you first begin to deal with foreign currencies some of the terminology might be confusing, not to mention the way it all works, so let’s try making it much clearer.
A currency is simply the form of money which happens to be accepted as legal tender in virtually any particular country. E.g. in the United States it’s the usa Dollar, in the united kingdom it’s the Great British Pound, and also in the 16 countries from the Euro Zone (e.g. France, Germany, Italy, Spain etc) it’s the Euro.
All of these currencies are “floating” against each other from the international money markets and may rise and fall in value relative to each other, usually as a result of events in international business.
Running a business terminology forex trading is referred to as Forex or FX for short. Inside the forex markets each currency is well known from a unique 3 letter abbreviation. Those that you will likely see in most cases will be the following;
USD United States Of America 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 Currency rates (Changing money from a currency into another)
To begin with to comprehend how forex trading rates are quoted and anything they mean, let’s begin by looking at a currency exchange transaction you will likely have done sooner or later in your life.
When you conduct an overseas exchange transaction (e.g. sending money to the folks back home) the dealer you conduct the transaction through shows the price of one currency against another expressed being a BUY rate inside a currency pair.
E.g. GBP/USD 1.6543. This exchange rate implies that 1 GBP (British pound) will buy $1.6543
Don’t be confused by how many digits appear after the decimal point. This simply allows for substantial transactions.
So, by way of example when you are a UK tourist thinking of your holiday spending money for a vacation to the united states the aforementioned rate will surely mean for you that 1 GBP will buy you $1.65 (We’re looking purely in the forex rate here, and ignoring any fees the dealer may charge).
If you’re planning on doing some serious spending on your vacation to the US the above exchange rate means that 1,000 GBP will buy you $1,654.30
Hopefully that’s fairly easy to understand. So, here you’ve been capable of seeing the first currency shown within a currency pair is definitely the base currency for the reason that pair, i.e. the pair is showing simply how much 1 unit in the base currency (GBP in this particular example) is worth inside the other currency (the USD in such a case).
If in your return out of your journey to the united states, you discover that you didn’t manage to spend all your US dollars and still have $1,000 left which you would like to convert back into GBP, the transaction you wish to accomplish is to Buy GBP by Selling the USD.
So, so you would ask your dealer to get a USD/GBP buy exchange rate. i.e. for every 1 US dollar, how many British Pounds will you produce?
If you’re changing funds in multiple currencies it’s easiest to consider all transactions regarding Buy rates as shown above.
When you go to a forex trading counter with a bank you will normally notice a display showing various exchange rates up against the domestic currency of the nation by which your bank branch is found. As an example, in New York basics currency table shows buy and then sell rates for those other currencies versus the USD.
When a base currency table showed the rates to the JPY to get BUY 94.86 and then sell 95.01 this simply means;
For each and every 1 USD you give you can expect to buy 94.86 JPYs, and in order to convert your JPYs back into USDs you simply use the Sell rate, so for each and every 95.01 JPYs that you SELL to the dealer they may hand you back 1 USD.
Hopefully you can now realize why this table is said to offer the USD as its base currency, for the reason that rates in the table all show the relationship from the foreign exchange (in this particular example the JPY Japanese Yen) to 1 USD.
You can hopefully also see how this table would really only be useful for folks who are only ever selling and buying just the USD against other currencies.
For example, it would be of only limited use to mention an Australian business woman who maybe desires to sell Australian dollars (AUDs) to be able to purchase goods in the US with USDs, but who receives payment on her behalf services to her Japanese clients in JPYs, and from her local clients in AUDs, and who should pay her local staff in AUDs, and who wants to have some EUROs in their pocket for her business trips to Europe !
In the particular life she doesn’t genuinely have one single base currency, as she receives her income in Japanese Yens and Australian Dollars, and spends profit AUDs, USDs and EURs.