In a domestic trading environment, buyers and sellers typically transact business through the medium of a single currency. Every business deal transacted at an international level involves two different currencies, each with its own intrinsic value. Each country has its own currency; for example, South Africa has the Rand, Mozambique has the Metical, and the United States has the U.S. Dollar. When attempting to sell goods in other countries, you will often be requested to quote or invoice foreign customers in a currency other than your local currency. When determining how much foreign currency is needed to match your local currency price for a consignment of goods, you will need to understand how foreign exchange rates work. This article focuses on foreign exchange rates and foreign exchange transactions.
What is a Foreign Exchange Rate?
A foreign exchange rate refers to the number of units of one currency you will receive in exchange for another. Foreign exchange rates constantly change or fluctuate and give rise to what is known as exchange risk.
What is a Foreign Exchange Transaction?
A foreign exchange transaction is a contract to buy or sell a quantity of a particular currency in exchange for another currency. For example, on the 16th of May 2022, if you had 1 British Pound, you would have been able to buy 1.23 U.S. Dollars. The foreign exchange rate is the number of U.S Dollars that can be exchanged for one British pound. The exchange of British Pounds for U.S Dollars would take place in what is known as the foreign exchange market. Foreign exchange markets operate whenever banks, companies and individuals buy and sell foreign currencies.
Where can I Learn more?
Your ability to manage financial risk and maximise opportunities heavily influences your international success. However, very few exporters know the full extent of the danger they face in the global market. When doing business internationally, you must understand foreign exchange rates and how to mitigate your exchange risk. Thankfully, Trade Forward Southern Africa, in collaboration with the International Trade Institute of Southern Africa, has created a free and comprehensive online training course on various aspects of global trade, including identifying and mitigating international financial risk. The modules provided include training on international finance, foreign exchange rates, Letters of Credit, international payment methods and Incoterms®. Click the links below to sign up for free and get started.
To sign up to the School of Export CLICK HERE.
If you already have a profile, CLICK HERE to login to begin the module.