Posted by forex at 7:55 AM
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1. Know how to interpret currency exchange rates. Exchange rates are quoted in terms of a base currency followed by the second currency. The quote tells you how much of the second currency is required to buy one unit of the base currency. For example, EUR/USD = 1.250 means it takes $1.2500 in U.S. dollars to buy 1 euro.
2. Understand the spread in foreign exchange. Currency brokers on the forex market use a bid/ask system. The broker will offer to sell a currency at one price and to buy at a slightly lower price. Pricing is based on the smallest change possible in the currency rate, called a pip. For example, the pip for the U.S. dollar is $0.0001 (1/100 cent). A spread of 4 pips means the broker is selling each dollar for 4/100 penny more than he is paying. Forex brokers keep this difference in lieu of charging commissions.
3. Calculate the cost of foreign exchange transactions by multiplying the spread times the number of currency units traded. For example, if you buy $100,000 worth of euros (a standard trading lot) with a 4 pip spread, the transaction cost is equal to $0.0004 x 1000,000, or $40.
4. Calculate the cost of converting one currency to another when you need money for expenses while traveling. You will usually be charged the current exchange rate plus a percentage by the bank, credit card issuer, or other provider. For example, suppose the euro/US dollar exchange rate is EUR/USD = 1.2500 and the provider charges a 2 percent transaction fee. If you buy 200 euros, it will cost you $250 plus a fee of $5 for a total of $255.