Currency Options

Foreign Exchange Transactions

All You Wanted To Know About Foreign Exchange Transaction
Knowledge of a making a foreign exchange transactions is not something we usually require every day. But as your business grows and crosses borders, or you vacation abroad, or you want to send home money to parents, or want to invest overseas, then you find yourself wanting. Hence to acquaintance yourself with procedures of a foreign exchange transaction is not a bad idea. Read further below under our foreign exchange rate calculator for a beginner’s guide into it.

Foreign Exchanges Options for Private and business customers making exchange exchange payments and their options

The below is a basic outline of the services offered by most non-bank providers for Individuals looking to make international payments or transfer money overseas.

##Spot contract##

A spot contract is a one-off payment usually used by clients with an immediate requirement to transfer funds. Clients are offered the rate of exchange at the time they wish to conduct their transaction. A legally binding contract is set-up with the agreed rate of exchange and as soon as the funds are received in full, the money is transferred into the beneficiary account. Most non-bank providers send the money as express payments via SWIFT (Society for Worldwide Interbank Financial Telecommunications) a highly specialised and secure messaging service ensuring monies are deposited as quickly and as securely as possible into the required account.

###Forward contract###

This is the buy now, pay later option of foreign exchange. It allows you to fix an exchange rate for up to two years and protect yourself against any movement in the market rates. Clients are offered a rate of exchange to which they agree a specified timeline (options include 6 months and 1 year). A deposit (usually 10%) is required up front and a maturity date will be set based on the agreed timeline of the client requirements upon which full settlement of funds is expected. This option is popular with clients who would like to remain within a set budget and have international payments due on set dates in the future.
Time Option

This option is similar to a forward contract but allows you the flexibility to draw down some or all of your funds up to three months prior to the maturity date you have set. If you have to make staged payments for your property or require more flexibility than a forward contract allows this could be ideal for you.

####Rate Watch Facility####

Most foreign exchange providers offer a rate watch facility whereby an individual can notify their dealer of the rate they are looking for and your private dealer will watch the rate for you and notify you as soon as your specified rate of exchange is achieved.

#####Limit order#####

If you’ve got time to hold out for a really good foreign exchange rate, individuals are able to specify the rate of exchange they would like. A contract is agreed for the provider to purchase the funds on your behalf as soon as the specified rate is achieved. The provider will then transfer the funds when the level is reached. This option is ideal for when you don’t have to make an immediate payment and you have a specific budget available.

######Regular Transfer Overseas Plan######

Individuals with monthly or quarterly payment requirements are able to set up a direct debit for their regular transfers. The rate of exchange is based on the set day of the direct debit and removes the hassle of sending payment instructions on a monthly / quarterly basis for those who have regular commitments that need to be met. Certain providers will conduct regular payments for their clients free of charge but there is usually a minimum requirement for this service.

Introduction to foreign exchange transactions shall start by first listing where is it required essentially.
• To obtain gains of repatriation
• To make overseas investments
• To borrow across border
• To manage finances in import or export business
• To convert foreign currency for dividends
Now let us understand the how does actually a foreign exchange transaction work.
Firstly you will need to nominate an amount. This amount is also called the contract amount. The two currencies which have to be exchanged form a currency pair. Both of them should be apposite to the provider of foreign exchange.
Secondly, you will then nominate a date when you want the exchange to happen between the two currencies. This date is known as the maturity date. The importance of this date is such that the exchange rate of currency will be determined by the rates as on this date of your nominated currencies.
Based upon when you set this date, the exchange rates are called differently as; Spot exchange rates, value today exchange rates, value tomorrow exchange rates and forward exchange rates. Some foreign exchange firms also refer to exchange rate as contract rate, maturity date as contract date.
Now you must note that whatever the position of foreign exchange, whether the price of Euro increases or falls, exchange rates for you will be as of maturity date only.
Your foreign exchange provider will also factor in some other components which play a role in deciding the final exchange rate. Following are some:
• the currency pair chosen
• the time zone chosen
• foreign exchange rates between banks
• interest rates between banks of the two countries of your currency pair
• the contract amount
• market volatility as on maturity date
So now you are loaded with all the basic functional information that you need to know before you make your first foreign exchange transaction. It is no rocket science after all. But the foreign exchange traders will agree that often it is rocket speed!


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