Money Exchange

People have various choices when they want to go for Money Transfer. From traditional methods to electronic transfers of payment can be opted for this transaction. The different modes available are as follows:

• Electronic Fund Transfer: This is an electronic mode of fund transfer from one bank account to another with the help of computer-based system. This transfer takes place within a single financial institution or across multiple institutions. This system functions without the intervention of any bank staff.
• Online Transfer: This mode of fund transfer is one of the easiest one. With the help of local bank service and a good internet connection can help an individual to transfer money through this process. The sender just needs to have few details with himself like name and address of the recipient, information about the recipient’s bank and SWIFT Code.
• Wire Transfer: This is the most popular mode to transfer money internationally. The sender has to visit institutions such as banks or agencies like Western Union and send the money. This mode of transfer gathers information about the recipient and details about their financial institution. The whole process may take few days to be completed.
• PayPal: This is another mode of money transfer which allows an individual to electronically transfer funds from one account to another. An additionally fee along with the exchange rate of transfer is charged.
• International Money Order: This is one of the safest and fastest means of sending money. This transaction is quiet economical too. The process is also quite simple as one just needs to deposit money order in their bank account and get it enchased. Sometimes the bank staff may ask for an ID proof. This process is ideal if the amount transferred is a small amount.
• E-mail Money Transfer: This is an online mode of money transfer. It does not have any extra charges associated with it. It is similar to the doing transaction bank to bank. The sender needs to log on to their bank’s website and fill up the form. The form does not require many information. The sender just needs to provide the receiver’s email id and answer a security question which he shares the answer with the receiver. After this an email is forwarded to the receiver from the bank and once the receiver answers the question correctly he is guided to the bank’s website wherein he has to provide the details of his accounts and complete the transaction. The transaction takes 2-3 days to be completed.
• Personal Cheques: In this mode of money transfer the cashing may be delayed as the bank has to verify the deposit. In this, the recipient will have to pay additional fee for the exchange rate and encashment.

There are also few service providers who assist in transfer of money. Initially people relied only on banks for such transactions but with evolving technology new methods are coming up and individuals are using these methods for money transfer. Few of the service provider types and how they function are discussed below:

• FX Brokers: These are Forex Exchange providers or brokers who are specialized in transferring money. These brokers are specialized in individual services or customized one in regards to transferring large amount of money. In most of the cases one may not have to even open an account with the company they intend to use their service. An individual just needs to fund his bank account.
• Money Transfer Operators: These are companies which offer services usually through agents. One do not need to open an account with them. One just need to fill up the form and provide identification to send money. Examples of such type of operators include Western Union, MoneyGram.

There are two big things which we need to understand if we want to transfer money to other country. They are:

• The Exchange Rate and
• The Hidden Cost

Hidden Cost is the margin added to the exchange rate by the currency exchange service providers.

In simple terms, money exchange is the exchange of one country’s currency for another. The relative value between the two countries’ currencies is Exchange Rate. It represents the value of one country’s money in terms of another’s. Exchange rate is the amount of one currency we need to buy or sell one unit of the other currencies. In other terms, exchange rate defines how many euros, baht, or rupees we can get for one US dollar. Exchange rate between the currencies either goes up and down all the time and it can either cost one a lot of money or either an individual can save a lot of money.

An exchange rate has two components: base currency and a counter currency. Now, let us find out what do these terms mean. In direct quotation, base currency is the foreign currency and our own country’s currency is the counter currency whereas it is just the reverse in case of indirect quotation. Domestic currency becomes the base currency and the other country’s currency becomes the foreign currency. Many exchange rates use US dollar as the base currency.

Exchange rates are of two types: Floating Exchange Rate and Fixed Exchange Rate.

Floating Exchange Rate: In this, the currency rate is determined by the market forces. This type is followed normally by most of the major nations.

Fixed Exchange Rate: There are few countries who fix their exchange rates to a widely accepted currency like US dollar.

There are few basic points which one should be aware of when it comes to currency exchange. They are summarized as follows:

• Sell Rate: Sell Rate is a rate at which we sell foreign currency in exchange for local.
• Buy Rate: This is a rate at which we buy foreign currency from people to exchange in local currency.
• Spot Rate: Spot Rate is the rate which banks and other financial institutions charge each other when trading quiet a good amount of foreign currency.
• Spread: It is the difference between buy and sell rates offered by foreign exchange provider.
• Commission: This is the fee which the foreign exchange providers charge from the customers for providing service.
• Cross Rate: This is the rate which is given to the customers who want to exchange currencies that do not involve local currency.

Foreign Exchange is also an important term which an individual should be aware of when dealing with Currency Exchange. Basically foreign exchange is the exchange of one currency to another. It also refers to the global market where trading of currencies is done 24/7. Some of the largest trading centers of the world include London, New York, Singapore, etc. The largest financial market in the world is the Global Foreign Exchange with trillions of dollars being traded. Foreign Exchange transactions include everything, be it conversion of currencies by a traveler at an airport to large amount of payments made by corporates. Transactions also include imports and exports. The term Foreign Exchange is popularly known as Forex or FX.

Forex Market is very important as it is the backbone of international trade and global investments. It is important in order to support imports and exports to create demand for goods and services.

The major reason why foreign exchange is important is that it shows the foreign investments value of a country. An unstable foreign exchange rate does not attract foreign investments whereas a stable exchange rate encourages foreign investments. Volatile Exchange Rate does not attract investors as they cannot predict the return on investments if the market is unstable. Import markets prosper if the currency is of high value whereas the export market gets a hit and vice versa if the currency has a low value.

The exchange rates are affected by many factors such as the country’s economy, inflation, unstable government, etc. If a country is having an unstable government, the value of that country’s currency is liable to decrease. Few of the important factors have been summarized below:

• Inflation Rate: Currency Exchange Rates are very much affected by inflation. A country which has lower inflation rate compared to another will have increase in value of its currency. The cost of goods and services will increase slowly if the inflation is low.
• Political Stability: Political state of a country also has an impact on the exchange rate. A country which has less political instability will attract more foreign investors. If there are more foreign investments then the value of domestic currency increases.
• Recession: Recession also has a major impact on the exchange rate. If a country experiences recession, its interest rate will fall thereby decreasing foreign investment and hence lowering the exchange rate.
• Interest rates: Any change in interest rate will directly affect currency value. All these factors like exchange rate, foreign exchange, inflation are inter related. Increase in interest rates causes an appreciation in country’s currency hence increase in exchange rates.
• Trade Terms: The ratio of export price compared to import is known as Terms of Trade. If the export’s price is greater compared to import’s price then the country’s Term of Trade improves. This affects an appreciation of exchange rate.
• Government Debt: Government debt is a type of public debt which is owned by Central Government. A country with higher government debt will attract foreign capital hence it will lead to inflation. This will result in a decrease in exchange rate.

• In general, if the exchange rates are higher, it is better because one will get more of foreign currency in case they are purchasing. A lower exchange rate is better when one is selling currency.
• A higher exchange rate increases a country’s purchasing power. A higher exchange rate is better for both individuals as well as country because when a nation’s currency is higher, importing goods from foreign countries become cheaper.
• A lower exchange rate increases a country’s exports.

With all these we can easily say that a higher exchange is better when one is buying and a lower exchange rate is better when one is selling.

Let us find out how the money exchange process is carried out and where this exchange rate plays its role. Suppose you are planning a trip from U.S. to Thailand. So what does an individual need to do in order to exchange his currency and what price does he need to pay for it. One just need to find out the rate for converting the money into the new currency. Then, he needs to pay conversion surcharges which maybe 2 percent fee on the transaction or a flat rate. It is always ideal to exchange currency whenever our currency is on the higher value because then we will get more of foreign currency. Many tourist who travels abroad exchange currency before they depart but it is always good to exchange currency in the country that we are travelling to.

Foreign Exchange is one of the most important factors affecting a country’s economic condition. It provides a window to a country’s economic stability. Hence if we are thinking of sending money to foreign countries, we need to be aware money exchange and its exchange rates.