Playing the currency game.
It's been hard to ignore the recent currency market volatility. Companies and individuals alike have felt the effects, as currencies have fluctuated in the face of economic uncertainty. From debt problems in the Eurozone--most notably in Greece, Portugal, Ireland and Spain, with fears that Italy may soon follow--to slowing momentum in the U.S. and UK economies; all have had an effect on the world's currencies. So, how do you get the most from this volatile marketplace?
The foreign exchange market is known as the Forex, the FX, or the currency market. It is a globally decentralised market for trading currencies. The United States, the Eurozone, Japan, the UK, Switzerland, Canada, Australia and New Zealand make up the majority of the market trade. The primary purpose of the Forex is to assist international trade and investment, by allowing businesses to convert one currency into another. A typical transaction would usually be when a party purchases a quantity of one currency, and then pays for it using a specific quantity of another. The modern foreign exchange market began forming during the 1970s, when countries gradually switched to floating exchange rates. This allows a currency's value to fluctuate according to demand on the foreign exchange market.
The foreign exchange Interbank market is the market where banks conduct their transactions. Since the currency market is decentralised, a single exchange for recording each trade doesn't exist. The big banks are the market makers who make bid-ask spreads in the currency market. This is the amount by which the ask price exceeds the bid--i.e. the difference between the highest price that a buyer is willing to pay and the lowest price for which a seller is willing to sell. Banks trade together constantly--either for themselves, or on behalf of their customers.
Banks use the Interbank Rate when they buy and sell currency to one another. Competitive brokers offer exchange rates that are close to the interbank rate, whereas many banks generate a large profit by applying a high margin. Retail clients often accept these high margins because it is more convenient than shopping around and opening a trading account for small sums.
Getting the best rates
It is important to open an account with a broker or bank that you trust. Many brokers or currency exchange websites will either quote indicative rates (which are often unrealistic), or simply the interbank rate (which will then prove to be an...
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