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Forex – the dreaded exchange rate

How the exchange rate works in forex trade.

“Why is the foreign exchange rate that you have quoted a lot higher than what I have seen online?”

This is a question we get asked daily and yes this is correct, the rate we quote would be slightly higher. This is a tricky concept to explain to an individual who does not deal with forex trades, as the immediate response would be that we have upped the rate to make a quick buck off clients. However, this is not the case, as we firmly believe that your money is hard earned, and we have done the necessary due diligence and research in order to ensure we provide the best possible rate of exchange for our clients.

The intent of this article is to give you some indication on how the rate works, in order to prepare you for the next time you decide to do a forex trade.

Spot rate

This is more formally known as the ‘interbank’ rate. It is the rate banks or large financial institutions charge each other when trading significant amounts of foreign currency. It is not the rate that an individual can buy currency at, as individuals are buying relatively small amounts of foreign currency at any given time. The rates shown in financial newspapers and broadcast media are usually the interbank rates, which is where the confusion comes in and why the rate that is quoted to you by a foreign-exchange provider and the rate that you see differ.

The following are examples of the difference you may see:

Interbank rate*

 

Currencies:

USD/ZAR US dollar/South African rand

Action

Currency

Amount

I buy

USD

100.00

I sell

ZAR

1 398.38

Quoted rate

 

Trade rate:

13.9838

 

 

Rate from foreign-exchange provider (incl. fees) *

 

Currencies:

USD/ZAR

Action

Currency

Amount

I buy

USD

100.00

I sell

ZAR

1 415.67

Quoted rate

 

Trade rate:

14.1567

 

The difference between the interbank rate and the rate quoted by the foreign-exchange provider is usually about R0.18c, which is calculated into the quoted rate. 

Spread

This is the difference between the buy and sell rates offered by a foreign-exchange provider.

For example;

Interbank rates at the time:

Outward (selling rands): R13.99*

Inward (buying rands): R13.89*

 

Outward trade:

Rate from foreign-exchange provider (incl. fees) *

 

Currencies:

USD/ZAR

Action

Currency

Amount

I buy

USD

706.38

I sell

ZAR

10 000.00

Quoted rate

 

Trade rate:

14.1567

 

Inward trade:

Rate from foreign-exchange provider (incl. fees) *

 

Currencies:

ZAR/USD South African rand/US dollar

Action

Currency

Amount

I buy

ZAR

9 699.23

I sell

USD

706.38

Quoted rate

 

Trade rate:

13.7309

 

Commission

This is a common fee that foreign-exchange providers charge for exchanging one currency to another. Always ensure that you are aware of all fees and/or commissions being charged by the provider and that you are getting the most competitive rates.

In closing, the rate that is seen online or in a newspaper will never compare to rates that are quoted by any foreign-exchange provider. Some providers charge exorbitant fees and commissions, among other expenses.

Ask the questions, even if you think they may sound invalid – it is your money and you have the right to make sure you are getting the best offer possible.

*These rates change all the time. The above examples were correct at the time of writing this article.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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