Avoiding Losses and Encouraging Gains in Foreign Exchange
Whether you need a small or large amount of foreign currency, the principles
are exactly the same and once applied, will ensure that you receive the most
currency you can, in as short a time as possible.
Principle Number 1: Who you buy from
The most fundamental and important principle is where you start; which
company or institution you choose to use for your transfer.
Bank or Building Society – The most obvious choice and surely one of the
most secure. However, these are attributes they know too well and often take
advantage of, leading to worse rates of exchange and less choice and
flexibility, where a little of each could go a long way.
Travel Agents/High Street Exchange Bureaus – If you require travel money it
is best to choose a high street bureau than one at the airport, but if you
need to transfer funds or need a larger amount of currency, if they aren’t
unable to help you, avoid at all costs anyway, as the rate of exchange is
amongst the worst you can achieve.
Foreign Exchange Brokerage – A brokerage is a specialist company that deals
solely with currency exchange, usually bank transfers and generally anything
above £5000, although many facilitate overseas mortgage payments in smaller
monthly amounts. There are many to choose from and they do differ in price,
expertise and service, but if you choose wisely there are a number of
benefits, not least the favourable rate of exchange and short timescale for
transfer of funds.
Introducing Currency Today with Toby Fischer:
Principle Number 2: How you buy your currency
There are a number of choices you have concerning the way in which you buy
your currency. Whilst the fx market is as hard to predict as any other
financial market, being equipped with more options give you the tools to
manage your gains (and your losses), securing what you have or using the
information you have to make a more calculated risk. Unfortunately most of
these options will be unavailable at the larger institutions such as banks
or building societies or at best not very forthcoming, offered to you only
by foreign exchange companies.
Forward Buying – As well as agreeing a rate and buying your currency
straight away for immediate onward transfer (called a ‘spot’ contract), you
also have the option of securing a rate ahead of time. This would obviously
be advantageous if the
exchange rate is favourable before you actually
require the currency and would like to take advantage of this fact. It is
also wise if you can see the exchange rate going against you in the future,
or if you simply wish to avoid the risk that could see you paying more for
your currency if the market does go against you.
There is usually a 10% deposit required upfront, with the balance required
at an agreed future date.
Stop/Limit Orders – These are very useful to know about as they can be an
effective method of risk management. A Stop order is when you set a lower
level in the market at an exchange rate that you do not wish to fall below.
For example, if you have bought an
overseas property and budgeted to a certain
figure, knowing that you can ill afford to spend more than this amount. A
stop order affectively ensures you do not fall below that figure, buying out
your currency at that rate before any further losses are felt. Additionally,
if the rate does move in your favour, you are able to increase the stop
order and so raising it to protect your bottom line whilst maximising your
profits.
A Limit Order is where a rate is set at the top end, so if an increase is
seen, perhaps when the market is closed or when you’re not able to buy, the
purchase will be made automatically for you at that desired upper level.
A Stop and Limit Order can be combined to minimize the risk involved if you
do choose to play the market and attempt to ride the trends in order to
realize potential gains.
Principle Number 3: Knowing what affects the market
Very few people that transfer foreign currency will know what factors affect
the market and when they come to light in order to gain the best advantage
from the timing of their transfer. To receive this information and
assistance from larger banking institutions is again very rare. Smaller,
more dedicated foreign exchange companies will have the time and expertise
to provide this sort of service at no charge.
Interest Rate Announcements – An increase in the interest rate of a nation
will often strengthen their currency, although this effect can often be felt
in any rhetoric that is released before hand, rather than the announcement
itself. The minutes of the meeting deciding the rate is also just as
important, indicating any possible future decisions and direction.
Consumer Reports – The pattern of consumer spending can be a strong
indicator of how financially stable a country is, and will in turn affect
the strength of her currency.
British Trade Data – One of the strongest indicators of how the currency
will perform against other nations is how a country is performing
economically amongst others, including import/export data, sales and
profits. A positive report for the U.K for example will often increase
confidence in overseas investment and consequently increase strength in the
pound, seeing it gain against other currencies.
When these principles are combined and applied together with the right
expert assistance, a blueprint should then be available to you to ensure you
make the right decisions and buy your
Euro / Pounds in the most cost
effective and efficient way possible.
