Exchange rates are crucial to a country’s economy because they affect financial flows and trade between nations. Exchange rates also affect you when sending money abroad. To save money you should always spend time looking for the provider with the best exchange rate for your currency pair. This guide will take you through what you need to know.
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.
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:
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.
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.
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.
Exchange rates are always changing and it’s impossible to determine the direction they will go. But as you have read, there are 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.