Exchange Rates

An FX transaction may be useful in managing the currency risk associated with importing or exporting goods and services denominated in foreign currency, investing or borrowing overseas, repatriating profits, converting foreign currency denominated dividends, or settling other foreign currency contractual arrangements.

How does an FX transaction work?

When you enter into an FX transaction, you nominate the amount (the contract amount) and the two currencies to be exchanged. These currencies are known as the currency pair and must be acceptable to your foreign exchange provider.

You also nominate the maturity date on which you want the exchange of currencies to take place. Your FX provider will then determine the exchange rate, known as the contract rate, based on the date and currencies nominated by you. The contract rate is the rate at which the currencies will be exchanged.

On the contract date the contract amount must be exchanged with your FX provider at the contract rate, irrespective of where the foreign exchange rate is at the time.

How does your FX provider determine your contract rate?

It is the agreed exchange rate at which the currency pair will be exchanged on the date of maturity. Your currency provider determines the contract rate, taking several factors into account including:
the currency pair and the time zone you choose to trade in the maturity date set by you inter-bank spot foreign exchange rates the contract amount, and your currency providers ability to trade small amounts on the inter-bank market market volatility inter-bank interest rates of the countries of the currency pair.

Contract rates are quoted as spot exchange rates, value today exchange rates, value tomorrow exchange rates, or forward exchange rates, depending on the maturity date nominated by you.

By: John Zilic

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Exchange rates are the value of one currency in terms of another. They are used by businessmen, traders, investors and travelers while performing foreign exchange transactions. The exchange-rates are impacted by several economic and political events across the globe and can be highly volatile. The fluctuations in the exchange rates today tend to aggravate during:
Economic slowdowns Political tension As a result, businessmen, traders, investors and travelers need to remain in touch with the current exchange-rates.

Factors Influencing Today’s Exchange Rates

Although innumerable factors can influence the exchange rates, some of the key factors are:
Inflation: If the inflation rate in a country is lower than that in another country, there will be an increase in the demand for goods from the former country to the other. This would raise the demand for that country’s currency, resulting in an upward pressure on the currency’s value. Change in competitiveness: With an increase in labor productivity, the competitiveness of goods and services produced in a country can increase in the global market. As a result, the demand for these goods could increase. With the trade from a country appreciating, the value of the country’s currency is bound to rise. Existing surplus in account: In this factor, the balance of trade in a country is the guiding point. When the value of a country’s exports is higher than the value of the imports from the nation, the inflow of foreign currency is higher than the outflow. This strengthens the country’s currency. Higher interest rates: When banks of a specific country start offering higher interest rates, it becomes highly profitable to deposit money in that country. As a result, the demand for the currency of that country rises. The strength or weakness of a currency can result in a rise or decline in the value of another currency, affecting the exchange rates today for that currency.

By: Alex K Cooper

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