Member Article

Managing your risk with currency brokers

The currency market is the largest financial market in the world, trading more than $4trn around the world every day. A third of this is traded in London.

The market is unique because it’s open 24hrs a day between 20:15 GMT on Sunday to 22.00 GMT Friday. During this time thousands of factors affect each individual currency, ranging from British elections, to American retail sales to floods in China.

The main players are the banks who trade the vast majority of the $4trn every day at the ‘interbank’ rate - literally a rate between the banks.

Smaller banks and brokers such as World First can get this rate as well and by taking smaller profits, they will in turn be able to pass this advantage on to their clients.

There are, of course, risks to dealing in the world’s financial markets and it can be tough trying to navigate them without specialist help. Fluctuations in currency rates can make a huge difference in the amount of money you end up with – a rate can move by as much as 10% over the course of a few days.

So it’s important - regardless of your needs, be they large or small - that you use global foreign exchange specialists who are authorised and registered by the Financial Services Authority (FSA).

The difference between banks and brokers

Foreign exchange brokers specialise in transferring funds internationally for clients. As this is their sole business they focus on getting clients a rate that is as close to the interbank rate as possible, whilst reducing or eliminating transfer fees and giving clients access to valuable products that can protect them from negative exchange rate movements in the future.

Most brokers quote their exchange rates based on the live interbank rate at the time you call them, whereas many banks set their rate first thing in the morning and hold this rate for a certain amount of time. The banks have to set this rate far enough away from the interbank rate in order to cover any potential fluctuations throughout the day. The closer you get to the interbank rate the better, so if your quote is based on the live rate (as with brokers) you are more likely to achieve this.

Key benefits of a foreign exchange broker:

1. Better exchange rates than the banks
2. Regularly savings of between 0.5% and 4% on the amount you transact
3. Faster international payments (same-day)
4. Forward contracts - fix the rate for a date in the future
5. Currency Options - Protection from negative rate moves with access to improvements in the rates
6. No commission and heavily reduced transfer fees
7. Bespoke and professional service with your own dedicated consultant
8. Free rate alert service and currency market updates
9. Regular transfer system and online payments

(Please note that some of these products or services may not be available through all foreign exchange brokers.)

Foreign exchange products available

Spot contracts

If you already have the funds in place, you could arrange a spot transaction. This is simply the exchange of one currency for another at the current market price where the settlement happens within two working days. A broker should be able to get you a significantly better exchange rate for this transaction.

Forward contracts

A forward contract allows you to fix a rate now for a date in the future (up to 2 years ahead). This means the rate is fixed regardless of exchange rate movements, thereby protecting you if the exchange rate moves against you.

Currency options

Like a forward contract, a ‘currency option’ allows you to exchange one currency for another on a future date, thereby protecting you from negative movements in the exchange rate. However, with an ‘option’, if the rate moves in your favour you can still take advantage of this. Only a few brokers can currently offer currency options to clients as it requires additional FSA authorisation.

Regular Payments

If you will be exchanging a set amount of funds on a regular basis, for example for mortgage payments or pension transfers, you can set up a regular payment order which will automatically transfer the funds on a regular basis.

Case studies

Forward Contract- protection from negative rate movements in the future.

A UK client was emigrating Europe in 6 months time and he was concerned the Euro would fluctuate before he moved his funds, meaning he would get less Euros for the £130,000 he was due to transfer. World First arranged a forward contract which enabled him to secure a rate his transfer six months later. On the transfer date the rate had fallen to the point that if he hadn’t secured the rate six months earlier, would have meant he received over 14,000 euros less for the same amount of sterling.

Currency Option- protection from negative rate movements whilst allowing access to improvements in the rate.

A UK client was due to complete the purchase of a €400,000 property in France in six months. She wanted to protect herself in case the rates moved against her, however she felt that Sterling would strengthen against the Euro before the completion date and did not want to miss out on this improvement if that was the case. World First arranged a Currency Option which enabled her to secure a rate of 1.1307 on 22nd Jan 2010 for the completion date six months later - a total cost of £353,763. She was therefore protected at this level and knew that regardless of any negative rate movements her property would not become more expensive. However on the completion date (11th June 2010) the rate had improved to 1.2014. As she had booked a currency option she was allowed to transfer all of her funds at the improved rate, meaning the property now cost her £332,945; a saving of £20,818, whilst having been fully protected if the rates had moved against her.

(Please note that not all brokers can offer Currency Options as they require additional FSA authorisation.)

Choosing the right broker

There are many foreign exchange brokers to choose from but for additional peace of mind it helps to use a broker that is authorised and regulated by the Financial Services Authority (FSA). A major stipulation of this regulation is to safeguard client funds by either segregating client money or having appropriate insurance in place to cover loss. By keeping clients’ money separate from the bank accounts they use to run their business, clients have extra protection should anything happen to the company.

It is always worth speaking to a broker to compare their rate against the bank and to find out what additional options may be available to you for your transfers. It is advisable to consider foreign exchange as early on in the process when you realise you will need to make a transfer at some point in the future.

Most brokers will be happy to discuss your individual requirements without you having to open an account with them. In order to book a transaction however they will require you to register and open an account which should be a simple process.

This was posted in Bdaily's Members' News section by Kathryn Thompson .