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Foreign Exchange Explained...

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  • Foreign Exchange Explained...

    Hi all.

    This will be my first (hopefully of many) post regarding the world of Foreign Exchange - the method of transferring funds internationally and inter-currency.

    My aim is to inform and make the 'jargon' common knowledge.
    - And so this particular post will focus only on why and when people transfer funds internationally and how they generally go about it, so this particular 'chapter' should give those of you who may need this type of service in the future, an insight as to how easy it is to maximise your potential savings or even gains.
    - For those of you who already have some knowledge of FX it may be quite boring, but bare wth me - I will go in-depth in my later posts!

    Foreign Exchange - The Basics

    Foreign Exchange (FX or FOREX) is used around the world on a daily basis, by both domestic users (personal funds) and commercial users (company funds). It is a means of sending a payment in a different currency to that of your own. For example;- You have Dollars ($ USD) and need to send a payment in Pounds Sterling (£ GBP). The most common use in the commercial world is for import/export purposes - when a company buys or sells goods internationally and, as a result of that, has to pay in a different currency.

    This is done by both Banks & FX providers alike - I will cover the process from both angles in future posts.

    The main method of send a payment is known as a 'Wire'. This is a direct transfer (Internationally) and is very straight forward. There are many other ways of payment sending and processing but this tends to be the favorite for it's ease of use, and cost.

    How do I 'Wire'?!

    Well, it's simple- when using a bank you simply call or fax to instruct them to wire the funds to another bank account using an IBAN (International Bank Account Number which is generally just your account numer in International format - you can normally find it at the top of your bank statement)
    Using an FX provider - you do the same!
    The person / company you are paying will receive the funds generally on a 3 day 'value' ('value' being the date the funds are received and can be used) but there are also other value dates available in most cases (including a 1 day value for urgent payments)

    How does my currency change from one to another?

    You instruct your provider to make a payment, you give them the end value (the amount of currency which needs to be received)
    They work that backwards to find out how much of your currency is required to make that payment and deduct it from your balance. The payment is then sent and the funds are received on the required value date. It really is that simple!.

    So How Much Am I Paying?

    You pay whatever 'rate' you get (providing your happy with it!)
    - And this is where it gets good...

    There is a rate known as Inter-Bank, this is the rate at which Banks and FX providers buy and sell currency to eachother. This is not available to corporate or personal users. It depends on how much 'margin' (profit) the provider wants to make from you that counts.

    So, for example, if the Inter-Bank rate is £1 = $2 - But your provider gives you £1 = $1.96 - the provider is making $0.04 cents for every pound you change (or the £ equivalent)
    Invariably the rate will differ depending on which provider you use - and this will be covered in my next post 'FX providers Vs Banks'.
    Now, 0.04cents may not sound a great deal, but given that most transfers are for substantial amounts this can be quite alot of profit for the provider.
    Again this particular issue will be covered in the next post.

    Rather than carry on (though I do want to!) I will leave this post be for now and open it up to any questions you have. If you don't think I've explained something enough please let me know and I will go into more detail.

    For now - I hope this section has filled some blanks and I will back in the next post to fill some more.
    Also the next post will be in-depth so if haven't covered something above that you are interested in please let me know so that I can incude it!

    Kind regards,

    FX Specialist

  • #2
    FX Providers Vs Banks

    In this post I will compare the transferring of funds through an FX Provider and a High Street Bank.

    Firstly, why do alot of people just use the bank?
    Many reasons;- but mainly the fact that they have used their bank for a number of years and believe them to offer the best level of service etc.
    Also due to the fact that they assume its easier and hassle free.
    This is not true.

    FOREX is about 5 % of any banks business, they do not deal with this type of service as much as they deal with, for example, loans and credit cards and so on. Therefore they have to maximise the profit they make from each individual use of the FX service.
    With a FOREX provider - it is generally 100 % of their business - and, as a result of this, do not have to make such a high margin from each individual transaction or client. In fact it's much less profit when compared to a bank.
    Obviously FX providers (like ours) are not 'non-profit organisations' and they do make money, otherwise I would be out of a job! We just make our profit more transparently.

    So many people just assume they are getting the best deal, again not true.

    They tend to just go the route they know, and lose out as a result.

    I always tell people, COMPARE!!!
    If you bought a car you wouldn't just go to one showroom and buy the first car you see, you would shop around wouldn't you?

    It should be the same with FX. Comparing the rate you get and the costs involved should be the first thing on your mind when you know you have to transfer internationally.
    Corporate companies look at FX in a different way - they see FX as a 'commodity' it is something they buy in order to exchange it for goods or services. Therefore they want to make sure that what they buy maximises their potential saving and/or gains.
    Why don't domestic clients also do this?!

    Anyway thats the rant over and done with!

    Back to the topic - lets compare the rate...

    I recently made a comparison for a client who wanted to know what I could have done for them on their previous transaction.

    They actually used one of the best known Banks in the UK (which I won't mention)
    They transferred £100,000 into Euros.

    This is what happened with the transaction.

    They instructed the bank to transfer the funds.

    From £100k the bank deducts 0.75 % commision leaving £99,250 to be transferred.

    They exchanged the funds at their rate which was £1 = 1.42 EUR.

    Client now has 140,935 EUR.

    --- Compared with our company the following would have happened ---

    Client instructs us to make the payment

    On the same day our 'low-rate' (the lowest rate for that day) was £1 = 1.46 EUR

    We don't charge a commision or a transaction fee.

    So the client would have simply exchanged £100k and received 146,000 EUR

    making a gain of 5,065 EUR. That is the profit the bank made on that transaction.

    We would still have made a profit, and the client would have gained also!

    This sounds way too good to be true, and if you don't believe these facts I would say to you, please compare what your getting, then you will see the proof!

    Anyway there is the comparison - and I hope you can all see why it's worth shopping around.

    Should anyone want anything covered more in-depth please let me know.

    I hope you all find this informative and not too boring!

    Kind regards,

    FX Specialist

    Comment


    • #3
      I didn't find it boring in the least but I will admit I don't understand alot of it. Couldn't you hire someone to help you with this if I were to ever need help with foreign exchange?

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      • #4
        Yea Tater! Can't we just hire someone to do it so that we wouldn't mess it up? I don't think that I would be comfortable with doing the "Forex" thing at all. I would mess up somewhere!

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        • #5
          Hello again, I'm back!

          Hi All

          Apologies for taking so long to reply to these posts - unfortunately I was in hospital for a period of time, but am now good to go again.
          I hope you are all well.

          In response to the posts about hiring someone to do it for you, that is possible. There are many traders out there - but I wouldn't just put my trust in anyone, so my advice is act cautiously (as if you wouldn't when it comes to your own hard earned money!)

          The MD of the company I work for was one of the Worlds most renowned traders for 22 years. Regularly in the top 5 (out of literally thousands)
          Him I would trust...

          The angle I was trying in my posts was to steer away from that type of FX and bring everyone back to the basics, like paying a mortgage overseas using a Bank or FX company, and how people lose out when they don't compare what they're getting.

          So from this point forward - I'll leave speculative trading etc to other threads, and I'll post about it in the future.

          And to keep it even more simple, I'll just say this.
          If anyone registered on the forum has any need to make an International payment of any sort, I will guarantee to beat any bank on both rate and level of service.
          in respect for the site and more particularly Brian, I will not be posting links to our company website or any other form of cheeky advertising.
          Instead - if you need help, just send me a PM. In return, anyone that does use our services will be helping this forum to grow stronger as I will pass on a commission to HomeMove to help with running costs.

          Kind regards

          FX Specialist

          Comment


          • #6
            That reminds me - must set up advertising tariffs on the site, for those who want to advertise.

            Comment

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