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About foreign exchange
Foreign exchange refers to the act of changing one nation's currency to another's. Today, foreign exchange, otherwise known as forex or FX, can refer to a few different aspects of dealing with international currencies. It can refer to trading currencies, where investors will buy and sell different currencies trying to make a profit largely in the same way as a stock trader would. It can also apply to simple exchanges of currencies for personal or business use. Foreign exchange can be particularly important if you live or have family overseas, invest in a foreign country, or have clients or suppliers located overseas.
How does the foreign exchange market work?
Currencies are traded regularly through electronic communications networks (ECNs) and by phone worldwide – to the tune of $5.1 trillion daily. The forex market is the largest financial market in the world, encompassing companies investing in foreign companies or services, tourists exchanging their home currency for trips around the world and experts looking to leverage rates to turn a profit.
Factors that affect how a country's currency trades against another are the sociopolitical atmosphere, prices and inflation rates, foreign trade and monetary policy and export-to-import price ratios. Less-aggressive factors are consumer confidence about the economy and economic growth, the strength of other currencies, investor speculation and day-to-day news about natural disasters, elections and new government policies.
Converting currency
You have many options when it comes to converting currencies, with each appealing to a specific situation.
- Banks. Nearly all banks offer a selection of currencies that allow you to convert funds, but more exotic currencies may not be available on short notice. Banks typically charge higher conversion fees and offer weaker exchange rates than your other options.
- International money transfer specialists. More companies are popping up that offer a full range of forex services with larger varieties of available currencies. These companies are normally online and let you send your money worldwide with competitive exchange rates and lower fees than banks.
- Foreign exchange kiosks and post offices. Usually found within airports, kiosks run by companies like Travelex offer foreign exchange services. Your post office may also convert funds to other currencies. Compare the rates and fees you'll be charged before converting with these services.
- Credit and debit cards. Many credit and debit cards automatically convert US dollars into foreign currencies when you're overseas. You'll normally pay foreign transaction and ATM withdrawal fees, whereas cards designed for international travel may allow you to lock in currencies at specific rates and waive foreign transaction fees.
"Hedge" your options to save on currency exchange
Many foreign exchange providers offer flexible tools that can insulate you against rapidly fluctuating market exchange rates – and help you better predict when it's best to complete your exchange. These hedging and planning tools include:
- Forward contracts. If the current exchange rate is in your favour, a forward contract could allow you to lock it in for future transaction, sometimes as far as two years into the future.
- Limit orders. Specify your ideal exchange rate with a limit order and when the market reaches that rate, it's locked in for you to complete your transaction.
- Stop-loss orders. A stop-loss order is nearly the opposite of a limit order: instead of specifying an ideal rate, you indicate a rate you want to avoid dropping below. If the market falls to that rate, your currency is purchased automatically, giving you the potential to profit when the market rises again.
- Recurring exchanges. If you need to send regular cross-border transfers – weekly, monthly or quarterly payments to the same recipient – many services will allow you to lock in more favourable exchange rates with lower fees.
How can I hedge with an online forex broker?
To begin hedging your forex trades, you'll need to:
- Determine your options. Learn whether your broker offers forward contracts, limit orders, stop-loss orders and hedging tools or find one that does.
- Assess your risk tolerance. No trade carries zero risk, so you'll need to determine how much risk you're willing to take.
- Choose two currencies to trade. Consider pairing the "majors" – for example, dollars and pounds – against the euro.
- Contact a forex broker. If you're a new client or will make ongoing exchanges, ask if you're eligible for any bonuses or perks.
How do I compare foreign exchange services?
- Conversion fees. Most banks and exchange companies will charge a fee for converting currencies. Because these fees can vary wildly, find out whether the provider charges a percentage of the total sale amount when buying or a flat fee.
- Exchange rates. Nearly all providers skew exchange rates for a profit. Some add a large margin to the mid-market rate, while more competitive providers will minimise this margin. Exercise your due diligence before going with one provider and you'll be sure to get more value out of your exchange. Look for the smallest margin between the mid-market rate and the rate you're offered.
- Processing times. Depending on why you're converting money and how much, how long it takes for your transaction to complete matters. Many companies provide priority services for an extra fee, so be sure to factor this fee into your comparison.
- Processing options. You might need to conduct regular transactions if you're making overseas mortgage payments. If so, add the availability of recurring exchanges to your comparison of providers.
- Extras. A provider may offer one-on-one services to business clients along with the ability to negotiate the rate. You might also be able to take advantage of forex market analysis with your foreign exchange provider.
While some providers offer competitive rates but higher fees, others could offer lower fees but weaker rates. Weigh rates and fees against convenience and compare at least three providers – banks and online specialists – before deciding on a service.
Back to topWhat are the pros and cons of foreign exchange?
Pros
- It's a convenient way to exchange one currency for another.
- Some companies can organise regular money transfers to pay overseas bills or mortgages easily.
- Competitive rates and fees are available through specialised money transfer companies.
- You can trade currencies to turn a profit.
Cons
- Currencies fluctuate daily, which means trading currencies can be risky.
- Exchanging currencies can be expensive, depending on the provider.
- The market can be complicated and difficult to fully understand.
Frequently asked questions
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Hope this helps!
Cheers,
Reggie
Hi George,
Thank you for your inquiry.
You can send money to Cameroon, and this option might be helpful for you.
I hope this information has helped.
Cheers,
Harold
sorry to bother you, how would i go about converting currency. the exchange rate isn’t available on the site although it is on forex sites, i have 2 500million zimbabwe dollar notes and would like them converted to aud in a new citibank account
Hi Jake,
Thanks for your question.
Once you open a city bank account, you can make a foreign currency deposit at one of their branches and it will be converted to AUD. Please note, we are a comparison website and provide general advice only.
Hope this helps.
Clarizza
necesito enviar 10.000 pesos a BUZIOS ,COO TENGO QUE GACER ,,VIVO EN CAPITAL FEDERAL—ES URGENTE
is there an expiration date on frequent flyer?
Hi Vaperperian,
Depending on which frequent flyer program you’re referring to, some frequent flyer memberships or points can expire.
Generally, most frequent flyer points expire if the frequent flyer account has been inactive for over 36 months.
You may wish to look over the terms and conditions of your preferred frequent flyer program to confirm if the same expiration terms and conditions apply there.
I hope this has answered your question.
Thanks,
Sally
Hola Maica ,
gracias por la pregunta.
Desafortunadamente en este momento no nos comparamos activamente servicios de transferencia para el envío de pesos dentro de América del Sur.
Es posible que desee comparar los servicios que permiten las transferencias de dinero de forma activa en América del Sur , como Viamericas , Xoom , Western Union o Intermex .
Espero que esto ayude ,
Marc .