Foreign Currency Exchange Basics

Category : Forex Trading

When it comes to currency exchange rates, these are applicable when the currency of a particular country is exchanged with that of another. For example, if you are in USA for a vacation, then you need to pay for your accommodation, meals and travel expenses in US Dollars. In that case, you have to sell off some off your British Pounds to get the equivalent amount in US Dollars.

Currency rates keep on fluctuating from time to time. While one currency value increases, there are others that might fall. Foreign currency traders decide to go ahead with the exchange transactions when there are chances of cashing in on the best foreign currency exchange rates . Retail customers have also made their presence felt in the forex market, mainly as speculators, who expect to make some profits owing to the fluctuating currency rates.

Then there is the off-exchange forex market that operates round the clock. It cannot be termed as a proper market as the transactions are carried out online and not through any central exchange or trading location. The trade is mainly carried out through the electronic networks.

The chief market for currencies is certainly the interbank market where large corporations, insurance companies and financial institutions manage the risks that are a result of the fluctuations in currency rates. The interbank market is available to organisations that conduct trade in large volume and thus have a very high net worth. In the past few years, we come across the development of a secondary over-the-counter or OTC market. This permits retail investors to take part in forex transactions. Though it may not provide the same rates as the interbank market yet the trading features remain quite similar to the former.

Forex transactions are denoted in pairs as you are buying one currency after selling off another. The former is known as the base currency while the latter is known as quote currency. A currency pair is also referred to as a bid-ask spread. The first section of the quote is an amount that you would eventually receive in exchange of a unit of the base currency.

In some countries dealers who are bound by the regulatory body must disclose the charges to the retail customers. There are no hard and fast rules when it comes to the charges imposed on the customer by the dealer. Before you open an account, you should run a check with the dealers and get an idea about the charges. If you hire the services of a broker or conduct trading through a currency exchange agency, then you may have to pay a separate amount for hiring the services of the third party.

When you buy buy foreign currency , it is necessary that you evaluate the current exchange rates. You may lose out on earning a sizable amount owing to the market fluctuations. You should also check the agreement that you have with your dealer when you are exchanging currency through them. This will help to keep you updated on your dealings.

About the Author:
Simon Corall is a financial expert and has authored several articles on diverse aspects of the financial market. He offers advice on relevant topics such as the best foreign currency exchange rates.

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