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The basics of foreign exchange

By Bidvest Bank
14-06-2011
The foreign exchange market in total is worth trillions of Rands. Most of this money is traded between banks speculatively, while the rest is currency that is bought and sold between governments, companies and private individuals.

Some companies buy currency on the foreign exchange market in the pursuit of profit. In many cases, this is done in order to make payments in foreign countries. Three primary factors affect these transactions: the rate of exchange, the time of exchange and exposure, which is related to risk.

Bidvest Bank is a registered commercial bank that offers foreign exchange services. These include travel foreign exchange, corporate foreign exchange and trade services. Contact us to invest safely and profitably in foreign countries or continue reading to learn about the basics of foreign exchange.

Trading in foreign exchange

Forex or FX is one of the biggest and most liquid currency markets in the world. This is because it’s run electronically and continuously over the counter (OTC) or on an inter-bank basis.

Transactions on the foreign exchange market are facilitated by the comparison of pairs. The base currency is that which is to be purchased, while the counter currency is that which is to be sold. The currency pair is represented by the amount of counter currency required in order to purchase one unit of base currency.

The four most-often traded currency pairs on the foreign exchange market are the Euro and US Dollar, US Dollar and Japanese Yen, British Pound and the US Dollar and the US Dollar and the Swiss Franc.

Types of foreign exchange trades

There are many different types of exchanges available, depending on the type of payment that is required. The following are some common foreign exchange trades:

  • Spot rate: This allows a buyer to purchase currency according to the market rate of the day. Bidvest Bank provides spot exchange rates for instant foreign exchange payments, quoting an exchange rate for a payment where the rate is valid for two working days.

  • Forward Exchange Contract (FEC): An FEC fixes the prices of future foreign exchange currency payments. This contract is between the buyer and the seller for a specified amount of one currency in exchange for another on a chosen future date, or between certain future dates, at a pre-agreed exchange rate. However, depending on the requirements of the buyer, an FEC may be flexible and delivery dates may be negotiable. Designed to protect buyers against unfavourable future rates, an FEC allows for certain predictability concerning cash flow.

Invest in foreign exchange with Bidvest Bank

Many individuals and companies are lured to trade on the foreign exchange market because it is electronic, highly liquid and open at all hours. Spot transactions give traders the ability to effect direct transactions without the involvement of a middleman.
For those who bring goods into and out of South Africa, Bidvest Bank is an ideal partner in facilitating profitable trade. We focus on all the major currencies in the global foreign exchange network. Our solutions include spot rate and FECs as well as trade services, foreign money transfers and exchange control services.

If you’re interested in entering the foreign exchange market, discuss the needs of your business with a Bidvest Bank consultant. Contact us today on 0860 11 11 77.