Currency Exchange for Sending Money to France
- Regulatory Framework
- Spot and Forward Contracts
- Negotiating the Rate
- Fees and Charges
- Setting up an Account
2. Spot and Forward Contracts
Currency exchange contracts come in two basic forms – either a 'spot rate' for immediate transfer or a 'forward rate' to lock in the rate for the future. It is also possible to use them in combination.
i. Spot Contract
A spot contract is where you make use of the exchange rate on offer at the time. You’ll agree on a rate with your Dealer and then pay for your currency at the time of purchase.
If you are making regular payments abroad you may be offered the rate that applies at the time, so this can change with each transfer depending on market conditions.
ii. Forward Contract
With a forward contract the rate is fixed at the time of the order for delivery at a date in the future, normally for a maximum of two years.
You are locked into an agreed rate, whether the market rate goes up or down.
The benefit of such a contract is of course that you have complete security about the exchange rate you will get for your money.
You will normally be required to deposit between 5% and 10% of the value of the contract. If the rate goes down you may need to increase the amount of the deposit to ensure that there remains a sufficient deposit in place. When your funds need to be transferred you send the balance to your broker.
You need to be on your toes when you negotiate such a contract to ensure that you are getting the best possible rate on the 'Spread' between the selling and purchase price.
This is not always easy to do because of the element of time that is added to the equation and the need for the broker to account for interest over time.
You also need to be sure you require them, for there is no point in getting yourself locked into a forward rate if, for instance, you have yet to sign the contract on the purchase of the property. You can simply act too early.
It is possible to get out of a forward contract by simply asking the broker to sell you back the money at the spot rate, so do not feel you are permanently locked in if the market changes dramatically.
The rate you get will be either lower or higher than that arranged in the forward contract, depending on how the market rate has moved.
It is also possible to arrange to roll forward the contract, although this is likely to affect the exchange rate.
iii. 'Stop Loss' and 'Limit' Orders
If you are not in a hurry for your money then you might wish to try and benefit from the ups and downs of the exchange rate by arranging ‘Stop Loss’ and ‘Limit’ orders with your currency broker.
A 'Stop-Loss Order' enables you to instruct your broker not to buy if the rate reaches a certain minimum price. The aim is to provide additional security to your exchange purchases.
Conversely, a 'Limit Order' is an instruction to your broker to buy when the rate hits a certain high level, so that you optimise the rate at which you buy.
Of course, there is no reason why you cannot use both together as a 'Stop-Limit Order', enabling you to ensure you do not buy below a minimum rate and you buy when it reaches an upper threshold.
Now, although these orders are in theory an excellent way to control your exchange dealings you do need to have confidence in your broker in the execution of such orders.
Thus, the terms of agreement with the broker need to specify that these orders are not discretionary, and that the broker is required to implement them when the threshold levels are reached.
Similarly, you need to have some confidence that the orders are not being executed when it is inappropriate to do so, or they take a larger margin that may have been agreed between you.
This is why we consider that you would be well advised to establish a relationship with a single broker to use on a habitual basis.
Do not give 'carte blanche' to any broker, but regular use of your selected broker at least holds out the prospect that you may be treated on the best terms.
Next: Negotiating the Rate
Back: Regulatory Framework
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