The Fluctuating Nature of the Foreign Currency Market
The foreign exchange rates keep on fluctuating. The rate volatility can have a major impact on businesses that conduct their trade globally. Such organisations, therefore, need to be additionally careful so that they can face these unforeseen circumstances and emerge out of them successfully. The fluctuations seem to affect the cash flow of businesses and their future profits.
Businesses that operate in the international trading market can safely guard themselves in the face of such adverse market conditions by acquiring prior knowledge of the way these markets work. The risks associated with the currency market can be averted with the right kind of guidance and insight into the mechanism of the market.
There are different ways to buy foreign currency and the most common ones include:
Forward Contract: This is an agreement that states that a particular amount of foreign currency can be bought or sold at a pre-determined rate on a date agreed on from beforehand. The forward foreign exchange rate is dependent on the exchange rates at the time when the contract is drafted. It is adjusted later on, keeping in mind the interest rate differential of the two currencies.
Spot Contract: A spot contract is an agreement that states the purchase or sale of a fixed amount of foreign currency, based on the present market value. The entire deal is to be drafted and put into practice within two business days.
If you own a company that specialises in the export and import of goods, even a small fluctuation of the rates can have a huge impact on the profits that you make. It is necessary to keep a tab of the fluctuating exchange rates as your business may end up losing a lot of money if there is a major drop in the rates, from the time an order was placed to the time of making the payment. You can refer to the advice of financial experts about the best time to execute your transactions, so that you do not end up losing money.
A forward contract can help you to shield yourself against a potential exchange rate risk by locking a future deal based on the current currency rates. Operating through spot contracts can also turn out to be a high-risk strategy. There may be sudden and heavy fluctuations in exchange rates. The increasing rates will obviously turn out to be a blessing in disguise, but a sudden drop may turn the tide against you.
Apart from organisations that conduct international trade, individuals who are travelling abroad may also need to buy foreign currency, if they happen to run out of their existing resources. For example, if you are travelling to UK and run out of cash halfway down the trip; you can sell something from your personal jewellery collection to arrange fast cash. You can sell gold in UK at an established jewellery store or even arrange for an online sale. However, you need to be extremely cautious when you are conducting an online transaction.
Author Bio: Simon Corall works as a financial expert. He has published several articles on the fluctuating rates in the foreign currency market and offers advice on the right time to sell and buy foreign currency.
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