Guide to Foreign Exchange
Does your small business have internet commitments such as investing overseas, managing imports and exports, or running a foreign payroll? You will need to navigate the murky waters of foreign currency market. In this guide to foreign exchange, you will learn what foreign exchange is and how your business can save money when dealing with international money transfers.
Foreign currency exchange: what is it?
Forex – foreign exchange – is the process of changing one currency to another. The currencies being exchanged are known as a currency pair and the exchange rate is the value of the second one in relation to the first. For instance, if you have Pounds but want Euros, you are interested in the Pound/Euro currency pair.
A currency pair is usually presented in coded form, with the codes being three letters that represent the currency itself as well as the country it comes from. For example, the currency code for the Euro is EUR while that of Pound is GBP, which stands for Great Britain Pound. With a currency pair, the money that you own is the base currency while the one that you want is well known as the quote or counter currency.
The exchange rate will tell you how much of the counter currency you will get for a unit of the base currency. For instance, for the GBP/EUR currency pair, an exchange rate of 1.40 means that you will get 1.40 Euros for every Pound that you have in your possession.
Are exchange rates static?
An exchange rate is far from static. Actually, the forex currency market is one of the most unpredictable trading platforms in the world. Exchange rates usually change depending on social, environmental, economical, and political developments. They can also fluctuate by as much as 10 percent in just a few days.
When you transfer currency overseas and the base currency is weak, you will be getting less for your money. On the other hand, if you move currency abroad when the base currency is strong, you will be getting value for your money. You need to keep track of exchange rate movements as well as market trends if you want to move your money abroad at a lucrative time.
How to manage your foreign currency transfers
The simplest way that your small business can manage foreign currency transfers is by doing some research and talking to foreign exchange providers who understand your needs and how to manage them in a cost-effective manner. A number of banks offer international money transfers and you can opt for this route. Moreover, there are currency brokers who can secure you a competitive exchange rate as well as help your business to introduce risk-free management strategies.
Using a broker is beneficial because he/she can keep you informed about the latest market movements. Other brokers provide additional services such as fixing a favorable rate for up to 2 years before a trade. The path that your business takes will depend on the manner it plans to defend against currency risk or the frequency and size of the currency transfers it has to conduct.
If your business has foreign exchange currency needs, the best way of making sure that they are managed efficiently is by taking the time to conduct your own research. When you do this, you will be able to see all the available options. Even if some of your customers deal with afghani currency, you will know what to do with the right research.
Once you are convinced that the provider you selected knows your business needs, you can protect your bottom line and benefit from better profitability.
Image via Pixabay