Exchange Rates

What’s It All About?

You go on a holiday to Spain... The Government lends Ghana money... A company imports Playstations from Japan…

In all these cases, there’s a need to exchange Pounds into a foreign currency (or the other way round).

If a British company wants to buy Playstations from Japan they need to change Pounds into Yen (Japan currency). This happens in the “Foreign Exchange Market” - also known as the “FX” market.

The FX market is a worldwide electronic market, open 24 hrs a day. It has no central meeting point - the participants (mainly banks) are linked electronically by phone, telex, information screens etc.

Foreign currencies are exchanged at a price that changes every second. There are many factors that cause changes in exchange rates, including economic trends & interest rates.

Similar to Commodities (last month’s Money Matters topic), currencies can also increase or decrease in price depending on how many people want them. e.g, if the whole world wants Playstations from Japan, there will be a huge demand for the Yen, so the price of Yen will go up. Banks make money by buying currency at a lower price & selling at a higher price. This is called an “FX Spread”...

Next time you’re going away (or even just passing your local bank), have a look at the Bureau de Change to see the difference in rates for ‘buying’ and ‘selling’ currency... you can even explain why to your mum & dad!

By Rabab Abedi
Rabab has spent 8 years working in investment banking, at Lazard Brother, Morgan Stanley and Hawkpoint Capital

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