How A Typical Foreign Exchange Transaction Works
When specialist currency brokers trade foreign currency for their clients
, they aim to get the very best exchange rates they can. The foreign exchange depends on many factors, all interacting at once. The world money market is a highly volatile one, and even tiny fluctuations in the exchange rate can cause massive alterations in individual profits, especially where big sums are involved.
Foreign currency brokers deal exclusively in the bulk trading of money on the foreign exchange, on behalf of their clients. The individual transactions can cover many areas: buying property abroad, sending cash to foreign relatives, trading goods and services or financing cross-border investments. To trade effectively, brokers have to speculate on how the market will behave at any one time, in order to get the best exchange rate.
The foreign exchange trading most familiar to people is spot trading, also called a spot delivery contract. In this, a binding contract is set up to buy and sell currency at the current foreign exchange rate. Brokers hold out for the best possible rate, and then (hopefully) bid at exactly the right time. However, this rate is very volatile. If it suddenly drops after the contract is struck, the trader has no choice but to continue with the exchange.
For this reason, if a brokers client is relatively sure of how their future import/export status will be, and the foreign exchange rates are dependable, the broker may suggest setting up a forward exchange contract. Here, a preset exchange rate is established, for a transaction to take place at a future date.
We at Pure FX are online foreign currency brokers who specialise in getting the best possible exchange rates for our clients, using a variety of proven trading methods.
by: Brooke Pens
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