Foreign Exchange 
What
does foreign exchange entail?
How do I protect myself against
currency fluctuation?
What is a Forward Contract?
What do people use Forward
Contracts for?
Is there an advantage to buying
or selling on specific days of the week?
Why are rates charged by currency
trading companies different than those published
in the newspapers?
How are currency values affected
by interest rate changes?
What is the difference between
currency exchange and currency speculation?
How big is the FX market?
What is a spot transaction?
Are Forward prices the same
as Spot prices?
What does foreign exchange entail?
Foreign
exchange is the settlement and arrangement
of funds around the world, by buying and
selling currencies. More than $1.5 trillion
dollars (US) is exchanged daily by thousands
of banks and foreign currency traders all
over the world.
How
do I protect myself against currency fluctuation?
The
most effective way to manage the risk of
currency instability is by purchasing foreign
currency Forward Contracts. They enable
you to lock into an exchange rate. You can
use your forward contracts to make payments
over a series of dates in the future.
What
is a Forward Contract?
Forward
transactions involve a delivery date further
into the future, possibly as far as a year
ahead. Traders agree to buy and sell currencies
for settlement at least three days later,
at predetermined exchange rates. This type
of transaction is often used by businesses
to reduce their exchange rate risk.
Why
do people use Forward Contracts?
By
buying or selling (forward
contracts) in the forward market, one
can protect the present value of a particular
currency from exchange rate volatility.
You lock in today's exchange rate instead
of a volatile currency exchange rate in
the future that could significantly devalue
your purchasing power.
Is
there an advantage to buying or selling
on specific days of the week?
No,
because today's international currency marketplace
operates around the clock.
Why
are the rates charged by currency trading
companies different than those published
in the newspapers?
The
currency exchange rates published in the
newspapers come from international wire
services, based on the dealing price. With
currencies being traded around the clock,
those published rates will always be behind
the actual dealing price.
How
are currency values affected by interest
rate changes?
Higher
rates attract foreign investors in search
of better returns. The resulting flow of
money in or out of a nation's economy will
affect the value of that nation's currency.
What
is the difference between currency exchange
and currency speculation?
We
exchange currency. To do this we help you
manage the risk associated with exchanging
one currency for another. And because this
'buying and selling' of currencies on behalf
of our clients is done on such a large scale,
we pass the better exchange rates on to
you. Currency speculation, on the other
hand, is about day trading to make a quick
buck. (This is not what we do). The currency
speculator is actually willing to take risk.
As a commercial client this is precisely
the risk you want to avoid.
How
big is the FX market?
On
average, the equivalent of about $1.5 trillion
in different currencies is traded daily
in the FX market around the world. Currency
exchange transactions are typically done
in amounts between $3 million and $10 million
by banks, fund managers and currency exchange
companies.
What is a spot transaction?
An
agreement to buy or sell currency at the
current exchange rate is known as a spot
transaction. Generally, spot
transactions are undertaken for an actual
exchange of currencies and delivered or
settled within two business days.
Are
Forward prices the same as Spot prices?
Generally
speaking, no. Theoretically, it is possible
for a forward price of a currency to
equal
its spot price. However, interest rates
must be considered. The interest rate
that
can be earned by holding different currencies
usually varies; therefore forward prices
can be higher or lower than (at a premium
or discount to) the spot
rates.
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