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.
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!