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There are more than 200 countries in the world, and most have their own currencies. A country's legal tender-currency-is its official medium of exchange for goods and services, as well as the preferred medium of payment.
Exchanging the currency of one country for that of another is called foreign exchange. While there is nothing mysterious about that process, the ever-changing value of one currency against another can have important implications for international business and the traveler.
Foreign exchange rates are determined by the market. The market rate is set by the multi-million dollar transactions of large banks and others in the capital markets. OrderWires.com offers competitive rates on all of its foreign exchange products.
Although there are nearly as many currencies in the world as there are countries, only six such currencies are considered to be major, because they all have a ready market and are traded competitively on major exchanges. These currencies are the U.S. dollar, the Canadian dollar, the British pound, the Swiss franc, the Japanese yen, and the euro.
Yet another group of currencies is considered to be minor. The foreign exchange market arbitrarily assigns the currencies of countries to this group. Although the number of minor currencies fluctuates, they variably include the Swedish kronor, the Danish kroner, and the Australian dollar.
These minor currencies generally are in less demand in the spot and forward markets, have more volatility in value as compared to the major currencies, have an increased likelihood of artificial controls on their exchange rate, and tend to follow a major currency in value fluctuation, often because of close economic ties to the country.
The remaining currencies of the world are referred to as exotics. Most exotics are the currencies of small countries or those which impose controls on currency conversion.
The business of trading one currency for another is similar to the trading of any other commodity, but its volume is far greater and its transactions, on the average, are smaller. For example, an American traveling abroad trades in this market when he exchanges his US dollar-traveler's checks for euros at a bureau de change. The American importer who is invoiced in British pounds trades in this market when he buys a foreign currency draft or wire.
At base, foreign exchange rates indicate comparative value. Any currency's given numerical value is simply an expression of that currency's value against that of another. In the United States, exchange rates are typically expressed as a foreign currency's value against the dollar. For example, at a given point in time, one US dollar will buy 115.15 Japanese yen, which is expressed as 115.15 yen/dollar. Therefore, determining the exchange value of yen in terms of US dollars involves dividing a known amount of yen by the exchange rate of 115.15. Conversely, determining the exchange value of US dollars in terms of yen involves multiplying a known amount of US dollars by 115.15.
The exchange rate of some currencies, known as direct currencies, is expressed as a percentage of the US dollar. These currencies-which can be from either the major or minor categories mentioned earlier-include the British pound, the New Zealand dollar, the Australian dollar, and the euro. For example, if the British pound is valued at, say, 1.5100, it means that you can purchase one British pound for US $1.51.
The opening and closing exchange rates you see quoted in the Wall Street Journal or on CNN are the rates applicable to large interbank transactions. Smaller everyday transactions use quoted exchange rates based on that market, but they reflect additional costs of delivery. Dealing in foreign currency involves several elements of transaction that affect the price, including the amount, the form of delivery, and whether the transaction occurs in the spot/forward market.
Every foreign currency exchange transaction is quoted as bid/ask and spot/forward. The bid/ask quote is like any other commodity or stock trade quote; the customer either wants to buy or sell.
In contrast, spot/forward quotes reference the currency's availability and delivery. A spot transaction literally means that the rate is quoted on the spot in the market; however, delivery actually occurs two days later, which makes an allowance for the time difference that may exist between markets.
Forward quotes are those which are offered now for fixed future transactions. These quotes are calculated by taking the spot quote and factoring in the interest rate differential between the two countries whose currencies are being exchanged. When trading a currency from a country whose interest rates are higher, the forward market, under normal circumstances, is said to be at a discount. In the reverse of this situation, the forward market is said to be a premium. Other considerations, such as market volatility and inflation, can also affect the spread.
Several means of carrying out transactions are available:
- Cash or banknote transaction. You should be aware that cash transactions receive the least favorable exchange rates of any foreign exchange transaction. There are several reasons for this: the costs of maintaining a foreign exchange window are considerable, because the operator must absorb losses from devaluation, the expense of physically moving the currency from market to market, and the costs of maintaining an inventory of money that cannot be invested. Currency kept in inventory simply sits in a cash drawer until it is sold; it earns no interest. And finally, the average cash transaction is so small that there is little opportunity to recover costs through volume. For these reasons, foreign currency transactions involving cash often incur a fee.
- Bank Draft. A check denominated in a foreign currency attracts a better exchange rate than does a cash transaction for several reasons: because the amount is generally larger, the check can be cleared on a cash letter (bank deposit) basis rather than having to be sold through a broker, and, since it receives ledger credit, this form of currency can be invested. However, the clearing process for a check transaction carries a cost; it can take five to seven days of mail time for a check to be deposited in a foreign bank account, and the handling of a check is labor-intensive.
- Wire transfer. The best exchange rates are given for any large foreign currency transaction delivered or received by wire transfer. This form of delivery results in readily available funds.
OrderWires.com offers a complete range of foreign exchange services. You can purchase foreign currency by means of:
- Cash. Orderwires.com sells foreign banknotes through the OrderCurrency.com. Your order can be placed for delivery by the next business day.
- Foreign draft. The foreign draft is comparable to a cashier's check. You may purchase a draft drawn in a foreign currency on a foreign bank. You must make the draft payable to a designated party and indicate the remitter's name.
- Foreign currency wire transfer. This is the most expedient and safest method of transferring funds outside the country. You may apply for a wire transfer now.
You can sell foreign currency to OrderWires.com in any of several ways:
- Cash. You can sell foreign currency in the form of banknotes. Some banknotes are accepted only on a collection basis-for example, exotics-and all banknotes are subject to the reporting requirements for cash transactions set by the Federal Reserve.
- Check. You may deposit a check drawn on a foreign source for provisional credit. The prevailing spot rate on the date of the deposit determines the US dollar value of the check.
- Wire transfer. An incoming wire transfer denominated in a foreign currency are purchased based on the spot rate prevailing on the value date. Instructions for directing this form of remittance vary from currency to currency.
If you would like additional information, contact the International Department at Orderwires.com or call us at 830-990-1342.
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