How do exchange rates work?
Exchange rates tell you the value of your money in a foreign currency. In other words, it is the price charged to purchase another currency. Foreign exchange traders determine the exchange rate for the majority of currencies. The market trades trillions of pounds per day.
Changes in exchange rates influence decisions of businesses, the government and individuals. Collectively, this affects inflation and economic activity.
When you are sending or buying currency, a higher rate is better because you get more currency for your money. When you are selling currency, a lower rate is better because the lower exchange rate will enable you to make a profit. Read below to find out how to get the best exchange rate.
How to find the best exchange rates
- Start Looking at Exchange Rates Early: It’s difficult to predict foreign exchange rates; not only do prices fluctuate from day to day, but prices are not the same across the board. However, it is advised that you start watching currency movements at least one month prior to sending funds abroad. Buy when the rate is climbing, and your currency is the strongest. Moreover, try to avoid buying your currency at the last minute and pre-order your money for a moderately better rate.
- Pay Attention to the Current Rate: Currency is always fluctuating due to supply and demand; therefore, the prices change daily. There are several factors that contribute to a change in rates. When a currency is in high demand, or there is a shortage in supply, the price will increase. There are several reasons for this, these include interest rates, economic forecasts, and employment rates. Fortunately, we can do this for you by comparing providers and exchange rates to help you get started, all you need to do is scroll up to the top of the page and use our handy comparison tool and bookmark the page when you are ready. You can also register with a sites, such as Transfer Wise, to get email alerts for the best rates.
- Don’t Use a Bank Transfer: Banks do offer convenient and secure international money transfer options; however, they do not provide value for money. You will often find that they offer the lowest exchange rates in comparison to international money transfer providers, whilst also charging hefty money transfer fees.
- Know the Mid-Market Rate: The mid-market rate is also known as the interbank rate, which is the rate midway between the global supply and demand for that currency, and the rates used by transfer services and banks when trading between themselves. Use the mid-market rate to compare any rates you are offered.
How to secure the best exchange rate
Hedging is a word used in the investment community, to describe lowering your risk or protecting you against loss on a trade. There are a number of tools you can use to hedge your risk in the currency transfer and foreign exchange market, these include the following:
Forward contracts
A forward contract enables you to lock in a decent exchange rate which protects you against unexpected movements in exchange rates. However, there is a chance that the rate will improve and you could get locked into a lower rate. Forward contracts are ideal for those making regular transfers or for businesses. The agreement will guarantee you a rate between 30 days and two years. A deposit is required, and the balance paid upon execution of the contract.
Limit orders
You state your ideal exchange rate, it is locked in once the market reaches that rate, and the transfer company will contact you to authorise and complete the transfer.
Stop-Loss Orders
A stop-loss order is the opposite of a limit order, it involves specifying the rate you want to avoid dropping below. Your currency is purchased automatically when the market falls to that rate. People often combine stop-loss orders and limit orders together.
Read our simple guide on how money transfers work to get a better understanding of forward contracts and limit orders.
Some Frequently Asked Questions
Conclusion
Exchange rates are always changing and it’s impossible to determine the direction they will go. But as you have read, the question of how to get the best exchange rate have steps you can take to ensure you get the best rate available at that time. We pride ourselves on providing reliable information that will benefit the reader, don’t just take our word for it; go out and do the research for yourself, so you are confident about the transaction you are going to make when sending money abroad.
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Artiom is a marketing graduate from the University of Portsmouth, Artiom’s primary experience is in PR and Outreach but he has a broad knowledge of search engine optimisation and all facets of digital marketing. He optimises the organic experience on MoneyTransfers.com with the content team manages and creates unique marketing tactics, and generally supports the overall growth of the website.