Brushing Up Some Basics Regarding Foreign Exchange

By: Paul Dubsky

Because you have to change your money into the currency of the country you wish to make a purchase of the house or whatever, it is prudent to know something about foreign currency exchange.

It is also important to make sure when you are ready to exchange your currency that you chose the best quote regarding the rates of exchange, as this can make a big difference.

There are a number of foreign currency exchange companies that will quote you much better prices than the high street banks, so look around.

We often hear about a currency pair. This describes two different currencies. The first mentioned, is the base currency. The second of the two currencies is the counter or quote currency.

Thus, in an example quote of EUR / USD 1.59 it means that for 1 EUR you have to give 1.59 USD

Since currencies move up or down all the time, the position can change and a EUR / USD quote may alter to EUR / USD 1.5910 meaning that the Euro went up in value. But, if for instance EUR / USD went to 1.5890 it would mean, that the dollar went up in value.

There are many currencies being traded, but the most traded ones are called Majors.
These are EUR / USD, GBP / USD, USD / JPY, USD / CAD, USD / CHF, AUD / USD

Pairs, where the euro is involved, are known as Euro Crosses. A currency pair where the USD is not included is called Cross Rates.

The bid price is the one at which the broker is prepared to buy, and the offer or asking price, is the one the broker is prepared to sell at.

Currency deposits are usually moved from one bank to the other by the use of the electronic transfer system (Society for Worldwide Interbank Financial
Telecommunication) SWIFT for short. This is a very fast and simple way to make the transfer.

Foreign Exchange is often known as Forex or FX.

Bull Market is a period of time when prices are seen to be rising.

Bear Market is a period of time when prices are seen to be falling.

Market Rate is an up to date quote for a currency pair.

Cable is a slang expression for Sterling / US dollar exchange rate.

It is as well to remember that the foreign exchange market is basically slotted in two levels. One is the retail level and the other is the wholesale level.

On the retail side, the smaller agents buy and sell foreign exchange taking the reading from the reference rates. These are adjusted constantly as events unfold in the market.

The wholesale level is an informal network of hundreds of brokerage companies and banks, who deal between themselves as well as very large corporations. It is this trade which is the one, when the newspapers make a reference to the foreign exchange.

These days, people are faced with several permutations. On one hand, they are watching the position of Sterling which has been under pressure lately for many reasons. They are also watching the prices of houses in the UK, and getting nervous
noting they depreciate more and more. This of course, makes them think it may be worth to buy abroad and sell in the UK before the prices do start to fall further.

On the other hand, prices of property abroad in some cases are also falling, but selling now would mean that with the Sterling depreciation, they could get a good exchange rate and eventually buy a house in the UK, especially if the prices get lower and lower.

But then of course, there is the other way of looking at it. For instance, the Euro might depreciate in due course versus the USD, and might push Sterling higher in relation to the Euro. It needs thinking about. One way or the other, it opens up possibilities of making money especially if catching things right.

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