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 will 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 the same asset can 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 with one another on a short-term basis. Market participants (banks, brokers, foreign exchange intermediaries, etc.) use this interbank rate as a basis for offering a rate to their clients. The margin applied by different institutions varies widely (from one to three times as much), given that there is no regulation on the OTC market. It is also worth bearing in mind that institutions apply their margins systematically on the basis of 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 EUR 4,430.27, depending on which institution is used to carry out the currency exchange transaction. This is because the rate (interbank rate + margin) applied by the intermediary would range 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 points to consider when carrying out your currency exchange transaction. By checking this information against your current currency exchange provider, you will get a better understanding of the rates (margins, fees) applied to your transactions. This will also allow you to compare different intermediaries and make the best choice for your expectations and needs.

1) Know the interbank rate

Knowing the current interbank rate is essential, as it allows you to make a genuine comparison between different institutions. Generally speaking, the converters offered by banks or currency exchange services unfortunately do not show this rate, but rather the rate with the margin already included. We recommend the Investing and TradingView websites/mobile apps, which are particularly comprehensive.

2) Know the margins applied by the foreign exchange intermediary

Get confirmation that your intermediary bases its rate on the interbank rate without applying a first hidden margin in its own favour. Example: the official interbank rate for the EUR/CHF pair is 1.1065, whereas your intermediary uses an interbank rate (excluding its margin) of 1.1075 to buy euros. A margin of 10 basis points has already been applied without your knowledge.

Important: don’t forget to check the fees that may be applied to your currency exchange transaction. These can vary depending on the currencies involved or the foreign exchange intermediary.

3) Understanding how “buying/selling” works

Understand and be familiar with the buying/selling mechanism, and in particular the direction of your transaction, in order to calculate the margin applied by your intermediary. The foreign exchange market is always represented by a standardised pair, such as EUR/CHF, with a currency known as the base currency, EUR, and a currency known as the quote currency, CHF.

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

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

3.1 Selling the quote 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 intermediary’s margin.

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

Your rate for selling CHF 5,000 against EUR will be:
1.1065 x (1+0.5%) = 1.1065 x 1.005 = 1.1120.

You will therefore receive 5,000 / 1.1120 = EUR 4,496.40.

3.2 Selling the base currency (EUR / CHF)

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

Your rate for selling EUR 5,000 against 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) Make sure of the quality of the service offered by the foreign exchange intermediary

One last essential point is the service your intermediary can offer you, 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 from registration through to the completion of your transactions, offering a transparent, efficient and responsive service. We also offer you the option of locking in your exchange rate in advance, giving you complete control over your transaction, at no additional cost. You can read our reviews on Trustpilot, which reflect our customers’ satisfaction.

Conclusion

Choosing the best option for your currency exchange isn’t necessarily easy, and we hope this article will help you better understand how currency exchange works. If in doubt, don’t hesitate to contact the currency exchange provider directly: at b-sharpe, we’re here to listen and provide you with the essential information you need to make your decision!