The Foreign Exchange Cost
One aspect of international money management is to effect such transactions at minimum cost. The conversion price is determined by getting quotes from buyers or sellers, and it can vary considerably depending on the identity of the participant.
In most countries other than the United States, the banking system is so set up that the local bank expects to make a profit from its foreign exchange activities, and it factors that profit into considerations of the banking relationship with a particular customer.
The possibilities for getting better rates that will be discussed in this section should therefore be weighed to determine whether or not a change would affect ability to get credit in one way or another or to continue other facilities.
In addition, to repeat the caveat made at the beginning of this chapter, it is not advantageous to set up a foreign exchange system unless the possible savings or earnings exceed the estimate cost.
The techniques for doing so are similar to other trading techniques and can vary from company to company. The saving on any one transaction is generally not great; but if there are many transactions and they are large enough in size, the result can be significant. The variance in rates quoted stems from the difference in bank position; each bank quotes according to its position and its feel for the market.
If one bank is long and another is short of a currency, the first should quote a slightly better rate for a sale and the second for a purchase. A company can take advantage of that situation.
This best-quotation technique is applicable to spot transactions and to a certain extent to forward transactions, but forward rates is generally much more volatile. Rather than try to get competitive quotations at a particular instant for forward rates, it is often better to compare different market quotations and get an indication of rates.
When the possible range has been determined, a firm order can be given at a particular figure or on a best-efforts basis, or action can be deferred until the situation improves. That approach will generally have the best results, since if a firm quotation is requested and the market is fluctuating, either the price will be shaded to afford protection to the quote or a quotation will be refused.
It is possible to operate in the suggested manner in the United States, Canada, and the United Kingdom. In most other countries, however, rates are either fixed or are not quoted on such a competitive basis. In addition foreign currency conversion can involve a number of other costs that increase the total expense: transaction charges, brokerage commissions, fees, value dates, and minimum amounts.