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Foreign Exchange FX - The basics
Foreign Exchange (FX) - The basics
Currency markets are constantly fluctuating, so knowing when to make your international payments can be tricky. And in today’s economic climate, it’s more important than ever to make the most of your money.
To do this, it is key that you understand all of the options available and that you get expert guidance on the currency markets.
To help you get to grips with things, see below for a brief outline of the tools/products that an FX specialist is likely to offer.
Spot contracts
Buy or sell a currency for immediate delivery. Spot contracts are suitable if you want to receive your currency quickly and efficiently.
Forward contracts
Book to buy/sell your currency in the future, at a rate you fix today. Forward contracts can help protect against adverse currency movements and can be used to lock into favourable exchange rates.
Stop loss orders
Set a minimum level at which you will buy/sell your currency. Your order will be fulfilled automatically if this rate is reached in the markets. Effectively, this guarantees a minimum rate at which your currency will be exchanged.
Limit orders
Set a higher target exchange rate at which you will buy/sell your currency. Your order will be fulfilled automatically if this rate is reached in the markets. Effectively, this guarantees a maximum rate at which your currency will be exchanged.
If you run a limit order in parallel with a stop loss order, the exchange rate at which you trade is guaranteed within a given range – which means you can plan ahead more effectively.
Regular payments
If you need to make regular international payments, you can arrange an automated ’regular payment plan’. This type of service takes the hassle out of regular overseas transfers, as the funds can be collected by Direct Debit and automatically sent abroad. Click here to find out more. www.moneycorp.com
Top tips to protect your spending power
1) Shop around
Look for the best deal, as you would for your car insurance. Don’t assume that your high street bank will offer you the best deal. Currency specialists will probably save you money by offering you better rates of exchange and lower transfer fees. Savings of 2% and more on exchange rates and £10 to £20 per transfer on transfer fees are very realistic (£120 to £240 per year if you’re making monthly payments).
2) Plan ahead
Currency markets fluctuate constantly and if you simply wait until you have to make a payment, you will get the exchange rate of the day and will have run the risk of markets turning against you. If 6 months ago you knew you had to make a payment in Euros around this time but had done nothing to secure your exchange rate, the payment would now cost you 20% more.
3) Get expert guidance
Currency market expertise is no longer restricted to bank trading floors. Currency specialists have teams of trained and qualified dealers who can help consumers and SMEs alike through the minefields that are the currency markets.
4) Don’t get stung by overseas banks
Be aware that overseas banks can often charge handling fees just for receiving your money. This can amount to up to 1% of the value of your transfer and can soon add up dependent on the amount of money you are sending or the regularity of your transfers. You can possibly negotiate with the receiving bank before sending your funds or currency specialists can also help.
5) Consolidate your payments
If you are sending money regularly, think about reducing the number of payments that you make and increasing the size of these payments. This will reduce transfer fees. However, you should also take steps to protect yourself from adverse exchange rate movements.
Timing is key
When people plan a new life overseas, moving their money is sometimes left to the last minute.
Currency markets are constantly fluctuating and transferring your funds at the right time, via the right channel, can make a big difference to the amount of money you end up with.
Never underestimate the value of a good exchange rate. You need to trade at the right time, in the right way, to make the most of your money.
Information supplied by Moneycorp, 100 Brompton Road, London, SW3 1ER
(Published May/June 2010)
