Converting Currency Online

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.

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It pays to know how much you’ll spend. This is a great financial truism for day-to-day life but it’s even more important on vacation. ATM transactions carry a small fee…for each transaction.

Very few people have a very good idea how much cash they’ll require while traveling …unless you’re the exception and have a fairly precise budget, it’s difficult to extract the correct amount in a single transaction. It can also be difficult to find a cash machine in many countries.

Also be careful to not withdraw an excessive amount of cash, which carries a theft risk. And converting funds back to your local currency also carries fees…which means fees at both ends, converting TO and converting FROM.

Traveler’s checks also have caveats…they’re not accepted everywhere and there’s a fee to purchase them.

As of this writing, Capital One was the last to offer a credit card without foreign transaction fees. But read the fine print…the credit card you applied for may not be the one you’re approved for.

Check the terms before using the card and be sure you can pay off the balance quickly if it has a high interest rate…or you’re simply paying fees a different way!

It’s a good idea to research what the comparative fees are before leaving, and to estimate a budget so that you know whether avoiding foreign transaction fees via credit card will actually be worth the APR and possible annual fees.

As always: the best plan is to have a plan.

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