Everything you need to know before carrying out a foreign exchange transaction

We have put together a list of four things you should know and check before carrying out your currency exchange transactions. This information will give you a clearer picture of your transactions, the margin and the fees charged, and help you choose the best option for your currency exchange.

How does the foreign exchange market work?

The foreign exchange market (FOREX) is an over-the-counter (OTC) market. This type of market is characterised by its decentralised nature. Buy and sell orders are therefore spread across several trading venues, meaning that an asset may be quoted at different prices at the same time.

The reference rate, known as the interbank rate, is the rate at which major global banks trade currencies on a short-term basis. Market participants (banks, brokers, foreign exchange intermediaries, etc.) use this interbank rate as a basis for offering rates to their clients. The margin applied by different institutions varies widely (from single to triple) given that there is no regulation in the over-the-counter market. It is also important to note that institutions apply their margins systematically based on the interbank rate.

Consequently, when exchanging CHF 5,000 for EUR at an interbank rate of 1.1065, the customer could receive between EUR 4,518.75 and 4,430.27, depending on the institution chosen to carry out the currency exchange. This is because the rate (interbank rate + margin) applied by the intermediary would fluctuate between 1.1065 and 1.1286.

4 things to check before exchanging currency 

To help you understand how currency exchange works, here is our list of four key points to consider when carrying out your currency exchange transaction. By checking this information against your current currency exchange provider, you will gain a better understanding of the rates (spreads, fees) applied to your transactions. This will also enable you to compare different providers and make the best choice to meet your expectations and needs.

1) Know the interbank rate

It is vitally important to check the current interbank rate, as this allows you to make a proper comparison between different institutions. Generally speaking, the conversion tools provided by banks or currency exchange services unfortunately do not show this rate, but rather the rate with the margin included. We recommend the Investing and TradingView websites and mobile apps, which are particularly comprehensive.

2) Understand the margins applied by the foreign exchange broker

Ensure that your broker uses the interbank rate without applying a hidden initial margin to their advantage. Example: the official interbank rate for the EUR/CHF pair is 1.1065, whereas your broker uses an interbank rate (excluding their margin) of 1.1075 for buying euros. A margin of 10 basis points has already been applied without your knowledge.

Important: don’t forget to check the fees that may apply to your currency exchange transaction. These may vary depending on the currencies involved or the currency exchange provider.

3) Understanding how “buying and selling” works

Understand and be familiar with the mechanics of buying and selling, and in particular the nature of your transaction, so that you can calculate the spread applied by your broker. The foreign exchange market is always represented by standardised currency pairs, such as EUR/CHF, with the EUR as the base currency and the CHF as the quote currency.

For example, when you want to exchange Swiss francs, this means you are selling them. Consequently, the currency you will receive (in this example, euros) is the one you are buying.

This type of calculation can be used with any currency pair. The key points are to know the direction of your trade (buy/sell) and which currency is the base currency and which is the quote currency.

3.1 Sale of the base currency (EUR/CHF)

If you are selling Swiss francs to convert them into euros (buying euros), you will need to multiply the interbank rate (1.1065) by your broker’s margin. 

For example: b-sharpe applies a margin of 0.5% on the interbank rate for transactions of less than CHF 50,000 equivalent.

Your rate for the sale of CHF 5,000 against EUR will be:
1.1065 × (1 + 0.5%) = 1.1065 × 1.005 = 1.1120.

Consequently, you will receive 5,000 / 1.1120 = 4,496.40 EUR.

3.2 Selling the base currency (EUR/CHF)

Conversely, if you are selling euros that you wish to convert into Swiss francs (purchasing Swiss francs), you will need to divide the interbank rate by your broker’s margin. 

Your exchange rate for the sale of EUR 5,000 for CHF will be:

 1.1065 / (1 + 0.5%) = 1.1065 / 1.005 = 1.1010.

You will therefore receive EUR 5,000 x 1.1010 = CHF 5,505.00

4) Ensure the quality of the service provided by the currency exchange broker

One final key point is the service your broker can offer, particularly in terms of speed, availability, transparency and advice. It is therefore important to choose an institution that will be able to meet your expectations and answer your questions.

At b-sharpe, our customer service team supports you every step of the way, from registration through to the completion of your transactions, offering a transparent, efficient and responsive service. We also offer the option to lock in your exchange rate in advance, giving you complete control over your transaction. There are no additional fees. You can read our reviews on Trustpilot, which reflect our customers’ satisfaction. 

Conclusion

Choosing the best option for your currency exchange isn’t always easy, and we hope this article will help you better understand how currency exchange works. If you have any doubts, please don’t hesitate to contact the currency exchange provider directly: at b-sharpe, we’re here to help and can provide you with the key information you need to make your decision!