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Learning About Currency Exchange Rates
When you want to exchange your American currency for another because you may be planning to travel outside the country you will usually go to a bank and get a currency exchange rate when they convert the money for you. Because the amount of the exchange is small, and you are an individual, it is unlikely you will get the same price as a trader who is making the exchange on the market. Instead, expect that the bank or currency exchange house will charge you more for the exchange. In other words they will mark up the price of the money for which you are changing. This allows them to make a profit. Expect the same treatment when you use credit cards in another country or even such companies as PayPal, a payment service provider, if you turn to them for a currency exchange.
In a previous blog we used a hypothetical example that claimed the “USD/CAD pair” was 1/1.0888 which results in the currency exchange rate being “0.91844/1” when the money is changed. However, it is very likely that the cost to buy one Canadian dollar could be perhaps as much as 1.1. The difference between the currency exchange rate and the market exchange rate is what the bank takes in in profit. There is a formula for figuring this as well. Simply subtract the two exchange rates and divide the amount by the market exchange rate – then multiple by 100.
The foreign exchange market – forex or FX – is a highly volatile and constantly changing market in which to trade. For the inexperienced trader you should know that it only takes a second to lose money. The forex is also an excellent choice for the market-savvy who understand currency trends and follow them. There is no question that currency exchange rates do follow patterns that can last days, weeks or even years, and when you know how these patterns who you can benefit from buying currency at particular times.
The FX is actually the largest market in the world in terms of volume of exchange. However, at this level the ‘players’ are generally international banks and financial centers. It is important to note that the forex or foreign exchange market is not responsible for setting or determining the value of different currencies. It only sets the market price as it currently appears when the value of one currency is demanded against another.
There are a few other points of interest for a trader to know about currency exchange rate and conversion. It is estimated that upwards of 5 trillion dollars a day occur on forex. The spread among trading institutions is generally quite tight – otherwise no money could be made. Even when banks quote the exchange rates for their best clients the corporations requesting the exchange should not expect anything more than narrow spreads. Customers who are going to travel abroad and want to exchange their money should know this in advance.