This is a great video that explains your relationship to currency exchanges. You probably will not know this 🙂
If you have ever done business or traveled overseas in the past, then you most likely have conducted a currency exchange. Were you aware of the fact that it is possible to have a foreign currency bank account of your very own and convert your money online at much better rates than what a bank will offer you?
In this article we will be showing you how an exchange rate can be targeted for your foreign exchange the way a professional Forex trader does it. That way you will be able to receive the best possible rate. When it comes to dealer quotes and currencies, we will guide you through all of the fundamentals that you really need to know.
When you first start dealing with foreign currency, you might get confused with some of its terminology, in addition to how everything works. Don’t worry, we will help to clear things up for you.
Currency is just a kind of money that is accepted as legal tender within a specific country. For example, it is the Great British Pound in the UK, the US Dollar in the United States and the Euro in 16 countries within the Euro Zone, including Spain, Italy, Germany and France. You can find out more about foreign currencies at thecurrencyshop.com.au.
These currencies all “float” against one another within the international money markets and increase or decrease in value relative to one another. These changes in value usually are the result of international business events.
Foreign exchange in business terminology is referred to as Forex or even FX. Each currency within the currency exchange markets is known by its own unique 3 letter abbreviation. The following are the ones you tend to see the most often:
EUR – Euro
USD – United States Dollar
JPY – Japanese Yen
GBP – Great British Pound
AUD – Australian Dollar
CAD – Canadian Dollar
ZAR – South African Rand
NZD – New Zealand Dollar
SGD – Singapore Dollar
CHF – Swiss Franc
Foreign Exchange Rate (Money changed from one currency to another one)
In order to start understanding what foreign exchange rates mean and how they are quoted, let’s start by taking a look at a common currency exchange transaction that you most like have done yourself at some point.
When you perform a foreign exchange transaction (like sending money back home to your family) the dealer you are conducting the transaction through shows the value of the two currencies against another in the form of the currency pair’s Buy rate.
For example, AUD/GBP 1.6543 means that with this exchange rate 1 British pound (GBP) will purchase $1.6543 US dollars.
Don’t get confused with the number of digits the follow the decimal point. It just is convenient when very large transactions are involved.
For instance, if you happen to be a tourist from Australia and you are considering spending money for your holiday on a trip over to the UK, the rate above would just mean you could buy $1.65 in AUS dollars for 1 GBP (In our example we are ignoring any fees that may be charged by the dealer and just looking at the currency exchange rate).
If you are planning to so do some serious spending while you are visiting the US, then the exchange rate from above means that you can buy $1.654.30 for your 1,000 GBP.
That is pretty easy to understand hopefully. Here you have seen that the first currency that is shown for a currency pair is the that pair’s base currency. In other words, it is the pair that show how much 1 unit of base currency (in this example GBP) is worth in the pair’s other currency (in this case the AUD).
If after you return from your UK trip, you discover you didn’t spend all the GBP’s you had, and have £1,000 left still that you would like to change back into AUD, you will want to now do a transaction where you sell GBP to buy AUD.
You would need to ask your dealer for the buy exchange rate for the USD/GBP. So for each 1 US Dollar, what number of British Pounds would you be able to buy?
When you are converting money into multiple currencies, the easiest thing to do is to view all of your transactions on the basis of Buy rates as we showed you in the above example.
Base Currency Tables
Whenever you go to a bank and visit the foreign exchange counter, you will usually see a display that show different exchanges rates for the domestic currency for the country where the bank branch is located. For example, a base currency table in New York will display sell and buy rates for all currencies against the USD.
When a base currency table displays the rates for JPY as Sell 95.01 and Buy 94.86 it means:
For each 1 USD you can purchase 94.86 JPYs. If you would like to convert JPYs back to USDs, you just use the Sell rate. What that means is that for each 95.01 JPYs that you sell to a dealer you will receive 1 USD.
You can hopefully see now why the table has USD as the base currency, since the rates in the table all show the foreign currency relationship to 1 USD (the Japanese Yen in our example).
You can also hopefully see how the table can only be useful for those individuals who just buy and sell against the USD only against other foreign currencies.
It would be of limited use to an Australian business woman wanting to sell Australian dollars to buy goods in the US using USDs, but who receives JPYs as payment for her services from her Japanese clients and in AUDs from local clients, and must pay in AUDS to her local staff, but would still like to have some EUROs on hand when she goes to Europe on business trips!
In her situation, she doesn’t have a single base currency really, since her income is received in both Australian Dollars and Japanese Yen, and she spends money in EURs, USDs and AUDs.