Currency, FOREX

Picking the Right Type of Currency Exchange Contract

Currency ExchangeThe reasons for sending money abroad are probably as a varied as every conceivable currency pair available. From paying off mortgages to transferring funds overseas to one of your suppliers or manufactures, globalisation means international money transfers are going to become more and more frequent and common place.

For the most part, banks are the first place people think of to use when doing transfers, but for those in the know, specialist currency brokers are the way to go when it comes to FOREX and incumbent considerations. Unlike banks, who have a multitude of services to handle, currency exchange (or FX) brokers focus solely on transferring funds between countries and exchanging funds. They do this with a variety of contract options and currency products at their disposal that are perfect for an array of specific circumstances. FX brokers are also able to offer better rates than most of the regular banks as they buy currency at wholesale prices from the live market (unlike banks, who only buy their currency at particular times of the day, thereby not getting the most accurate rate) to then pass the savings on to their clients.

One of the most popular options offered by specialist brokers is the Spot contract. This fairly simple way to buy currency means you can purchase the one of our choice there and then, where the market stands at that particular time. This works best when you're happy with the rate at where it currently is and are keen to execute the trade immediately. This type of contract is popular with people who've sold a house or piece of property abroad as they are then able to transfer the full amount in a single, easy transaction.

Another well-used contract type is the Forward contract which effectively allows the client to ‘set' the exchange rate for the agreed duration of the contract which is usually up to 24 months in advance. The client will agree a rate with their currency broker, pay of deposit of about 10%, and will then be able to transfer money at that exchange rate for the specified amount of time. Again, property is an ideal example of how best this can be used, as is the case with regular mortgage payments to another country. Business payments are another example of where this type of contract is ideal if you're paying workers every month (or even receiving a salary). In fact, any regular transfer, no matter the reason, is suited for use with a Forward as it adds predictability to your transactions (especially during these volatile times).

Limit Orders are the a 3rd popular choice with currency broker clients and this type of currency exchange contract lets you as the customer stipulate the level at which you want to buy at when that level is reached. Ideal when you’ve a bit of time to play with and can wait until the right moment to trade, for example, if you're immigrating and need to send funds across to your destination but can hold off sending the money for a while so that you're receiving the biggest bang for your buck.

Stop Loss Orders, on the other hand, allow a broker's client to buy their desired currency when the rate reaches the lowest level the client has pre-specified to trade. The main intention with a Stop Loss Order is to protect against sudden dips in the market, those that might occur where economic, political or even social conditions are such that they can have a sudden and negative effect on the currency you're looking to purchase or sell. An example of when it might be best to use a Stop Loss is the on-going political issues in South Africa. A worry for those who might be selling a property there considering how strike action has devalued ZAR, with a Stop Loss, you'll be able to set the minimum rate at which you want to trade at, protecting yourself if things take a turn for the worst.

David Blake blogs regularly on financial matters for various currency brokerages and FX providers.

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