What is a Currency Exchange?

January 26th, 2022

US First Exchange is a federally licensed currency broker. But what exactly is a currency broker? We are not the only ones. If you search online, you find a wide range of currency exchanges, and you have probably found them in brick and mortar stores as well. No doubt, you have run across the small airport kiosks providing travelers with access to currency for their final destinations.

What makes online vs. offline different? Are there reasons to use a currency exchange vs. your local bank to obtain currency for traveling, investing, or even collecting?

Simply defined, a currency exchange is a licensed business exchanging different currencies for customers. The business exchanges physical money, either coins or banknotes. Exchanges make money by charging a nominal fee and/or through the bid-ask spread.

Don’t confuse a currency exchange with the foreign exchange market, commonly referred to as a forex market. A forex market is similar to a stock market, where traders and even financial institutions perform transactions in different currencies.

Remember, fees and exchange rates can be different through different exchanges. There is no real standardization between exchanges. When choosing an exchange, make sure you understand the fee structure and how they calculate exchange rates.

How Do Currency Exchange Rates Work?

Let’s look at an example to understand how a basic exchange works. You’ve arrived back into the States from a trip to Europe. You have a pocket full of Euros and need to change them back into US dollars. You stop into an exchange kiosk at the airport, hand them your Euros and then they hand you back an “equivalent” amount in US dollars.

The exchange will modify the market rate to ensure they make a profit on the transaction. They are a business, after all. Suppose the market rate for Euros is EUR:USD 1.13. The exchange store may modify this rate to 1.03, which means their profit would be 10 cents on each Euro. On top of modifying the exchange rate, processing fees may also be added to the transaction.

Transactions within exchanges makes international trade possible. Especially, when currencies are easily convertible. Convertibility among currencies can be a problem when shopping for an exchange to convert your currency. Many exotic currencies or “soft” currencies may not be available to convert in every exchange. Be aware of this when you hold currencies that are not part of the major currencies used in international transactions. Convertibility isn’t only an issue you might encounter in exchanges, but in local banks as well.

What is a Foreign Exchange Market?

Foreign Exchange Market Purpose

The foreign exchange market is the channel whereby currencies can be traded by investors or international businesses. This is the marketplace that houses currency exchange rates and allows banks and other financial institutions to calculate conversions in currency transactions.

The foreign exchange market is more important now than ever due to the volume of international trade via online transactions. You may have experienced this yourself. You purchase something from Europe or the UK. The FX market allows them to access exchange rates to process and convert your US dollars into local currencies. Also, if you run a business in the US and open your markets internationally, you need to provide a mechanism for a customer without US dollars to purchase your products in their local currency.

Currency Hedging

FX markets protect businesses from dramatic changes in currency rates by allowing currency hedging. For example, a retail store in the UK imports goods from Japan to sell in their local markets. The UK store has 90 days to pay the Japanese company for the goods. To protect against currency fluctuations, the UK store enters into a contract with their bank to make payment in 90 days at an agreed-on rate. Locking in the rate protects the UK firm from a sudden depreciation of the pound.

Currency Arbitrage

Arbitrage is the ability to buy and sell a currency for a profit. As a result of technology that allows computers to monitor forex markets throughout the world, traders can benefit from arbitrage. Algorithms allow a trader to scan multiple exchanges looking for potential exchange rate differences. For example, if they notice the value of a Japanese yen is cheaper in Hong Kong than it is in London, they could buy the yen in Hong Kong and then sell in London, profiting from the difference.

What is An Exchange Rate and What Does It Mean?

Exchange Rate Calculations

Currency Exchange Rates

Exchange rate is the value of one currency versus the currency of another. Because values are always relative, currency values are always presented in pairs. For example, EUR:USD means 1 EUR = x USD. Today, if you plugged in this value into a currency calculator, it would generate EUR:USD = $1.13.

Maybe you want to do some currency conversion yourself, or at least understand how the math works. It is not some complicated algorithm or high-level math. It is basic multiplication or division.

Once you have your list of exchange rates, you easily do the math as follows:

  • For example, let's look at the EUR and the USD.
  • In your rate sheet, you see that 1 EUR equals 1.125 USD
  • If converting from EUR to USD, multiply the amount you want by the exchange value.
  • For example, 500 EUR times 1.125 equals 562.50 USD.
  • If converting back into USD, you would divide the amount by the rate.
  • For example, 500 USD divided by 1.125 equals 444.44 USD.

If you are looking at the rates and see them listed as EUR/USD, when you go left to right you multiply and when you go right to left you divide.

Exchange Rate Pricing

Exchange rates are determined by changes in the foreign exchange market. Most currencies are free-floating or fixed. Free-floating currencies can vary based on their position in the market against other currencies. Some currencies are fixed in value. Being fixed means they are pegged to the value of another currency.

This is especially true for smaller economies and developing countries. It is common for a currency to peg their value to the US dollar or other major currency. It is rarely a hard peg, but can float within a range. For example, the Hong Kong dollar is pegged to the USD at a range of 7.75 to 7.852.

Exchange Rate Terminology

  • Spot Rate

Sometimes referred to as the cash value of the currency, a spot rate is the current market value.

  • Forward Value

Forward value is the expectation for the currency to rise or fall versus its spot price. This can change based on the currency it is paired with.

  • Onshore/Offshore Rates

Exchange rates can be different even within the same country. Various countries restrict their currency by limiting exchange only within their borders. This doesn’t mean you can’t ever access these currencies, only that there will be an internal or onshore rate and an external or offshore rate. China is a good example of a currency with this rate structure.

  • Cross Rates

Cross rates is the exchange between two currencies, but the exchange takes place in a country in which neither of the currencies are the official currency. For example, if an exchange rate between the euro and the pound sterling were quoted by an American bank on US soil, this would be the cross rate.

  • Forward Rates

The forward rate is the exchange rate at which a buyer and seller agree to transact a currency in the future. This was covered earlier in how businesses use the foreign exchange markets to hedge the value of a currency against future decreases.

Impacts on Exchange Rates

Most flexible exchange rates will vary from day to day but only in small increments. However, major economic factors such as travel restrictions, government policies, or large business decisions can impact internal exchange rate.

We have seen this even with the US Dollar. When the national debt rises dramatically, the dollar will often drop in value against other major internal currencies. Several countries in Europe over the last decade saw tremendous economic turmoil. For example, when Greece experienced an economic meltdown it impacted the value of the Euro giving the USD more buying power in the region.

Even in developing nations such as Iraq or Vietnam, economic stability can push the value of their currency upward. As both of these countries have stabilized and attracted international investment, you have seen the currencies grow in strength and begin rising in value.

Interest rates impact the strength of a currency. The higher an interest rate paid by a country’s central bank will make it more valuable. Investors will exchange currency for the higher paying currency driving up the value of the currency because of the increase in demand.

Money supply can increase or decrease currency value. If governments print too much money, the increase in supply will often drive down the value of a currency, triggering inflation in their economy.

Can You Make Money Through a Currency Exchange?

Yes, money can be made trading currencies. Like any investment, the key is to buy low and sell high.

There are two vehicles investors use to profit from currency trading. First is through the foreign exchange (forex) markets. Currency traders that take this approach tend to be similar to day traders looking for slight bumps or decreases in pricing and jumping on the action.

Profiting from this strategy takes research and dedication to charts and fundamentals. Just like the day trader, you can participate in futures and options and other investment strategies.

The other option for investing in currencies is a long term passive approach. Investors who follow this strategy will tend toward currency exchanges where they can order and keep hard currency for future value. Not that there isn’t research and good decision-making that goes into this strategy, but it is more like a long term buy and hold strategy many employ in the stock market.

Where to Find a Currency Exchange?

Currency Exchange Data Graph and Charts Data on Screen

If you are looking to purchase hard currency, you need to locate a currency exchange. It should come as no surprise that relying on street or airport kiosks is not going to generate the best rates and fees.

You do have other options. Banks are one option, but they will not have every currency you may be interested in. They also take longer to deliver your currency.

Online currency brokers are your best bet for speed and favorable rates and fees. But even with online brokers, you need to be careful.

Especially if you are looking for exotic and hard to find currencies, you need a source you can trust, not a fly-by-night dealer where you worry over security and certified currency. Instead of taking your chances with Ebay, coin shops, or banks, use US First Exchange.

We're 3rd-generation currency brokers and one of the only mail-order currency exchange companies licensed by the US federal government to do business in all 50 states. We deal in over 20 popular and exotic currencies, including the Iraqi Dinar.

We created US First Exchange to provide the best exchange rates and lowest fees for foreign currency. Plus, you can order from the comfort of your home, and have your currency delivered to your front door.

Besides the ease of transaction and favorable rates, US First Exchange has other features most currency brokers don’t have.

100% Insured Transactions

Many currencies brokers are fly-by-night operations who put up an internet operation to capitalize on rising currencies like the Dinar. Security on these systems are usually low, exposing your information to potential cyber criminals. They rarely insure transactions 100%, if they provide insurance at all.

Worst is that they may not be available when you are ready to redeem any currency you purchased.

Fully Secure

In light of ransomware attacks on competitors (google the Travelex Attack) and the ongoing threat that online security poses, we can’t stress this enough: our platform is safe, reliable and secure.

Our process ensures your data protection and a customer service team that is available for your transactions. We aim to provide the best service and that includes having people to answer your questions and guide you through the process.

Fully Licensed

We are a licensed Money Services business, fully licensed and in compliance with the US Department of Treasury. This is increasingly important. You will find many brokers online that may have approval from their domiciled state, but aren’t in full compliance with the US Treasury.

Experience

US First Exchange is an established currency broker with years of experience with all the major currencies and including exotic currencies like the Iraqi Dinar.

Buying currency online is convenient because it is shipped directly to your front door. Each banknote is certified and inspected before shipping. All orders are 100% insured.

Final Thoughts

You can buy foreign currency online through a secure platform when you use US First Exchange. If you want a safe and convenient way to buy and sell any foreign currency, here's why you should use US First Exchange:

  • Shipping is fully insured on all orders
  • 24-48 hour shipping options via FedEx
  • Secure payment options include credit, debit, and wire transfer

Create your order today and receive any foreign currency in 24-48 hours. Pay online through our secure platform by debit card, credit card, or PayPal.Ready to buy or sell foreign currency? No more waiting. We provide everything you need to ship and receive funds for currencies you own.

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