Understanding the financial language of foreign exchange?
Posted by Admin 18.07.2010 | 0 Comments
Interbank Rate
The interbank rate can be applied to a variety of financial products including Foreign Exchange, interest rates etc. Simply put it refers to the rate at which banks trade with each other. The interbank rate is a reflection of the live trading rates between banks and is used by all members of the Currencies Direct trading team to ensure they are able to provide the best rate possible to their clients for their transactions.
Spot Rate
A spot rate is the actual rate offered by the currency broker at that instant and is a reflection of the live interbank rate. Obviously as the market is moving constantly the spot rate is only available at the time it is given and not at any time after.
Forward Contract
A forward contract is an agreement to buy currency today at an agreed rate but take receipt of the money at any point up to 24 months from that date. A forward contract only requires a 10% initial down payment by the client at the time of booking. Any further draw downs have to be settled at that time.
This is a very powerful tool used by canny investors to eliminate the currency risk inherent in buying off plan property. To illustrate this lets look at two examples. Client A and Client B both agree to purchase identical off plan properties in Spain for €100,000 with a payment schedule of:
Payment 1: 30% - Immediately
Payment 2: 30% - After 12 months
Payment 3: 40% - After 18 months
Client A - sends the money by using spot transactions on each payment date but unfortunately during that time the £ loses value and he gets the following rates:
Payment 1: €30,000 at 1.46 = £20,547.95
Payment 2: €30,000 at 1.28 = £23,437.50
Payment 3: €40,000 at 1.16 = £34,482.76
Total = £78,468.21
Client B - books the entire amount at the same time using a forward contract
Payment 1: €30,000 at 1.44 = £20,833.33
Payment 2: €30,000 at 1.44 = £20,833.33
Payment 3: €40,000 at 1.44 = £27,777.78
Total = £69,444.44
As you can see Client B saves over £9,000 on the property purchase simply by booking a forward contract. Therefore it is always wise to look into whether a forward contract could suit your requirements.
Limit Orders
A limit order is an order that is placed by a client that has restrictions upon its execution. The limit order could be either an upper or lower limit or either a buy or sell order.
Marketwatch
As the name suggests this is simply a way for the client to monitor the market without actually having to do it themselves. As with a limit order if a client is looking to achieve a particular level for their transaction then once the client informs the dealer of this level the dealer will monitor the market and as soon as it is possible to offer that the dealer will let them know. The client is then free to make a decision to trade at that point.
All these services are free of charge and provided by Currencies Direct to help you achieve the best rate possible for your foreign exchange transactions.
Tel: 0845 130 8148 | Email: london@currenciesdirect.com | www.currenciesdirect.com