What is Forex?


1st Jan 2015 Managing your Money

What is Forex?

There are two sides of the foreign exchange market. The first is transactional, where a person needs to buy goods in a foreign currency, or a tourist needs to buy holiday money, and a bank or specialist provider (like UKForex) exchanges the two currencies for them.

Forex is the commonly used term in the financial services industry for foreign exchange, which refers to converting one country’s currency into another.

Many things influence exchange rates, such as a country’s economic performance or geopolitical instability. Central banks also attempt to manipulate exchange rates by setting interest rates: generally, when interest rates are raised, a country’s currency becomes stronger and vice versa.


Currencies are very volatile 

The exchange rate of currencies moves up and down constantly. In our increasingly global world, these fluctuations affect everyone. Even if you don’t travel overseas or run a multinational business, the strength or weakness of the Pound will still pull on your purse strings.

You only need to glance across the channel to see events affecting currency risk, such as the economic crisis in Europe. The real possibility of Greece pulling out of the Eurozone and the ongoing problems in its economy have seen Sterling reach seven-year highs against the Euro.

That’s great if you’re planning a trip to the Continent this summer. It’s less helpful if you’re a UK-based business who exports to Europe.

So whether you’re planning to buy a holiday home, receive an inheritance from overseas or import new products from China, how can you avoid getting stung?


The real rate

The first thing to know is that the currency rate you see isn’t the rate you’ll get. When you see a GBP-EUR rate of €1.30, for example, that’s the interbank rate. It’s what the banks use to transact with one another. You should also see better rates if you’re transferring a larger amount of money, so be sure to shop around for the best quote.


Hidden costs and fees

The currency provider’s margin isn’t all you’ll pay. Many financial institutions charge fees for carrying out a transfer. These tend to vary depending on the size of the transfer and whether you do it over the internet, by phone, or in a branch. In some cases if the amount of money you’re transferring is large enough the fee may be reduced or waived.


Protect Yourself against currency Movements

If you have investments overseas, such as property, or a business that trades overseas, your costs can spiral if the exchange rate tips against you. You can defend against this risk with special financial products known as “hedging tools”. These may include “forward contracts” which allow you to lock in your rate now and deliver your funds at some point in the future. It protects you against the value of the currency moving against you down the line.