Feature this, you have just landed in a foreign country, you need to exchange your currency, but you don’t know anything about currency conversion and rates. You end up exchanging your currency anywhere you get. You won’t know when being cheated and may incur higher conversion rates losing the money you could have otherwise saved. However, here are some insights about currency exchange and the best way to do it.
The foreign exchange market
The foreign currency exchange rates are not standard and fluctuate, depending on the market’s supply and demand. One way of getting foreign currency is to exchange it at your bank early enough before your departure to a foreign country. The advantage of exchanging currency with your bank at home is that you will do it free of exchange rates, unlike changing it at the airport exchange booths or in a foreign country. However, ensure you contact your bank early enough since the currency you want may not be available and may take some days to be available.
Another cheap way to exchange currency at a lower rate is to do it at an airport ATM on arrival using your credit card. You will incur exchange fees in terms of a foreign transaction charge, but unlike airport exchange booths with high exchange rates in the market, an ATM will be favorable. If your bank has a network in the local country or a partner network, using it may save you from paying the out-of-network ATM charge. But, to minimize costs, avoid frequent withdrawals. You can also choose to make purchases with your credit card while abroad. But you will incur conversion charges to the local currency. But that may be much better than carrying cash.
If you are not comfortable using your credit card, you can exchange your currency in online platforms that offer bulk currency exchange and deliver it to you for free. But, understand their rates and beware of any hidden charges. Still, you need to know about the currency codes to avoid confusion during the exchange.
Why use currency codes?
Currency codes refer to the unique codes assigned to every form of currency to display the conversion rates—for example, USD for US dollars or JPY for Japanese yen. If you see USD/JPY=110, it means that a US dollar is currently equal to 110 Japanese yen. Currency codes are useful for easy identification and show you how much your local currency is worth a particular foreign currency.
Factors that affect foreign exchange rates
As earlier mentioned, the foreign exchange market dramatically fluctuates from time to time since it is a decentralized system where trade happens over the counter without external governmental control. One thing that can affect the foreign exchange rate is the psychology of the forex exchange market. The conversion rates depend on currency volumes and supply and demand, and the market involves many stakeholders, including the bank, tourists, the average trader, etc.
In a given country, political and economic factors can affect the exchange rates. Political factors can refer to political stability or instability. Economic factors refer to the state of the country’s economy, such as inflations or trade relations, leading to currency risks.
Currency risk
Currency risk occurs when the rate of an investor’s local currency fluctuates compared to a foreign investment currency. That causes international businesses to incur unforeseen losses or profits.
