Exchange rates baffle a lot of new remitters. Many don’t know how exchange rates work; this blog will help you understand exchange rates slightly better. Here at ATL money transfer, we monitor them regularly and continuously working towards finding the best deals for our customers.
Let’s say you want to send money to Ghana from the UK. Even though you are sending pounds, chances are the recipient will receive the amount in Ghanaian cedis, the official currency of Ghana. Regardless of what money transfer solution you use, the funds will be converted to Ghanaian cedis along the way using the exchange rate.
And it’s not just Ghana; no matter where your destination country is, sending money abroad will most often involve converting your funds to another currency. This conversion process requires exchange rates. Let us understand what exactly is an exchange rate, and how does it work?
What is the exchange rate?
Simply put, an exchange rate refers to the value of a currency concerning another. For example, how many Gambian dalasis are equal to one UK pound. Apart from international money transfers, these rates are associated with international travel.
How are exchange rates set?
The foreign exchange market, also known as forex, is the global marketplace where the currencies are exchanged for business and foreign trade. Forex uses price quotes to compare different currencies, which are known as currency pairs. The foreign exchange market plays a significant role in determining exchange rates and is the currency conversion hub.
Let us look at an example currency pair and how they are used to represent exchange rates: UKP/GHS 7.94
In the above currency pair, “UKP” represents the UK pound as the base currency. The secondary currency “GHS” represents Ghanaian cedis which here is the quote currency. The number that follows indicates how many quote currency (GHS) must buy one base currency unit (UKP). In the above example, one UK pound is equal to 7.94 Ghanaian cedis.
Understanding the Floating and Fixed Exchange Rate
There are two ways of determining currency prices around the world. They are commonly referred to as floating and fixed exchange rates. Let us understand them:
- Floating exchange rate: A currency’s supply and demand determine the floating exchange rate, decided by the foreign exchange market. Floating exchange rates change constantly. If the demand for any currency rises, so will its value. Trade is a significant factor that affects the floating exchange rate of any nation’s currency.
- Fixed exchange rate: Unlike floating exchange rates, a fixed exchange rate uses a nation’s government standard to determine its value. Many countries used the gold standard in a fixed exchange rate system. They used to set a fixed price for gold and used to base the value of their currency on that price. But countries could use another country’s currency or any widely used asset as a standard too.
The “mid-market” rate
In a nutshell, the mid-market rate is average between how much the sellers are willing to sell a currency and how much the buyers are willing to pay for it. This rate is directly co-related by the ongoing transactions in the foreign exchange market. You can also consider this as the “real” exchange rate. The “mid-market” rate captures the actual value of how much a currency is worth.
High vs Low exchange rates
You may have heard the terms high and low exchange rate. But do you know which one is preferable for which situation? When you want to send money abroad, a high exchange rate is preferable. Because your currency is equal to more units of another currency, a currency that benefits from a high exchange rate is considered “strong”.
A low exchange rate is not preferred when remitting money as the recipient is getting less than they might have received with a higher rate. Therefore, a poor exchange rate is only preferable when you are selling currency.
How often do exchange rates change?
The exchange rates are constantly changing. They don’t just change once a day, but multiple times a day. Bankers and traders buy and sell currencies 24/7 in the foreign exchange market, and this is why the value of currency never stands still.
How Vital are Exchange Rates While Remitting?
Exchange rates are significant while remitting money abroad. No one wants to lose money. That is why dispatching is preferable with high exchange rates, as the recipient will receive more money than if you had transferred your cash at a low exchange rate.
But getting the best exchange rate can be tricky as it is hard to find a bank or transfer services that use mid-market rate. Most service providers will adjust their exchange rate to be in their favour as a fee for the service provided.
But even with a slight difference, you could lose quite a bit of money to banks or transfer companies.
Understanding the exchange rates are extremely important while sending money abroad. With a better knowledge of the exchange rate, you can make sure you and your recipient don’t lose out on expensive currency conversions. Having a clear picture of the foreign exchange rate will help you to avoid unforeseen expenses while remitting. With ATL money transfer, you send money across the world both quickly, conveniently and with fair exchange rates. For more information, visit our website www.atlmoneytransfer.com or write to us at firstname.lastname@example.org.