Foreign Exchange – a guide to how the money markets work

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Foreign Exchange – a guide to how the money markets work

The foreign exchange market is worth over €2.3 billion. The majority of this is traded between banks for speculative purposes. A large amount however is traded by companies and private individuals in order to make payments overseas.

The markets work by large companies buying and selling currency for profit. The amount that is bought or sold determines the rate shown on currency websites. Due to the change between supply and demand, exchange rates fluctuate all the time.

There are various organisations that can convert currencies. Banks usually offer foreign exchange services, as do specialist foreign exchange dealers.

Working the Foreign Exchange Markets

The timing of a transaction is crucial to making money go further. Exchange rates change constantly and 10% fluctuations in a relatively short space of time are not uncommon. This could effectively increase, by 10% or more, the amount due when transferring money from one currency to another, for example exchanging Pound Sterling for Euro.

The are a variety of currency transfer options available depending on what is needed: 

• looking to make large payments in a another currency (for example to purchase a property) 
• looking to make smaller, more regular payments in a another currency (pension payments)

Spot Contracts

This option is suitable to purchase currency immediately. The rate received will be according to the markets on that day. Once the rate has been agreed with a currency dealer, arrangements will be made to send the money straight over to the designated bank account in France.

Transfers can be completed in one day to Europe when using a specialist foreign currency broker.

Forward Contracts

This option is ideal for people who need to make a payment in the future and wish to lock into a favourable exchange rate or to protect themselves from adverse exchange rate movements.

A forward contract offers the opportunity to fix an exchange rate for up to two years in the future, while paying only a small deposit. 

Forward contracts can be for a set date in the future or can be flexible, depending on what is required.

The following example shows how using a forward contract can save substantially on a large cost such as a property purchase in France, paid in GBP. 

• A person looking to buy a €250,000 property in France for example would have received a rate of around 1.44 in mid-February 2006. The property would therefore have cost them £173,611. If they had booked a forward contract three months earlier however they would have received a rate of 1.49, so the property would have cost them just £167,785, a saving of nearly £6,000.

Stop loss orders

Stop loss orders are suitable for people who have funds to transfer but who have no real time constraints and are therefore looking to make the most of any favourable currency movements, while protecting themselves from any adverse currency movements.

It is an automated market order whereby you set a minimum level at which, if the markets reach this level, you will buy or sell your currency.

This effectively guarantees the minimum rate.

Limit Orders

These are suitable for people who have funds to transfer but who have no real time constraints and are therefore looking to make the most of a favourable currency movement, if one occurs.

This is another automated order whereby you set a target exchange rate at which, if the rate is achieved, you will buy or sell your currency.

Stop loss and limit orders can be run together to make the most of positive currency movements, while offering protection from negative movements.

Regular Payments

A regular payment plan is appropriate if regular currency transfers are being made (such as overseas mortgage or pension payments). This service removes the worry caused by exchange rate fluctuations when making currency payments over a period of time. An exchange rate can be fixed for up to two years on payments made within this time.

Further Information

• AngloINFO INFOrmation Page Glossary of Foreign Exchange Terminology
• AngloINFO INFOrmation Page Foreign Exchange Converter
• AngloINFO INFOrmation Page on Foreign Exchange & Property Purchase in France

Information supplied by Janine Harrison, Key Account Executive Moneycorp 
Web: www.moneycorp.com /Tel: +44 (0)20 7823 7500 / e-mail
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