How Foreign Exchange Actually Works

If you’ve ever filed a claim for an expense incurred abroad, or if you’ve done any international travel, you’ve likely dealt with foreign exchange. Do you ever feel confused by the process, or have you felt that your claim wasn’t paid the amount that  you expected once the currency was converted? Foreign exchange, also known as “fx” or “forex,” may impact how your international claims are paid. Here's what you need to know…

Foreign exchange rates change often.  All major currencies were based on the “Gold Standard,” which was the value of the currency as compared to the actual value of gold. In 1971, the President of the United States, Richard Nixon, decided to remove the US Dollar from the Gold Standard, which allowed the value of the dollar to “float” based on the rate of exchange with other currencies.  In fact, floating rates remain in effect today and the exchange rate changes by the minute across most major currencies.  On most days of the week, the global currency market averages the equivalent of 5 trillion US Dollars!

Now that you know how foreign exchange started, you can understand how currency rates change.  For example, on November 30 last year, an apple cost $1.03. Yesterday, apples cost $1.17. If you bought a million apples last year and a million this year, that’s $136,000 difference in how much you paid. The same logic of apple prices can be applied to currencies.  the foreign exchange rate is the cost to exchange one form of currency for another, whether it is euro, yen, dollar, pound, etc.

Given the size of the currency market, several websites are available to quote the exchange rate between currencies. These websites can serve as a tool for estimating approximate exchange rates.  These websites generally offer three data points for viewing currency exchange rates: last, bid, or ask. Last is simply the rate at which the last large trade was made between the currencies listed (for example, exchanging US dollars for Euros). Bid is the rate you would get if you were selling a currency, and ask is the price to buy a currency. So if you’re looking to “buy” Swiss Francs (shown as CHF) with US dollars, you’d look at the “ask” rate.

So what about Seven Corners? If these websites are so popular and internationally recognized, why don’t we use those same rates for our currency conversions? There are a few reasons.

1. Most free websites show “inter-bank” rates. These rates represent the favorable rates that banks trade currency, which are usually large volumes and frequent.  Individuals looking to exchange currencies will not get the same favorable rates. 

2. If you read the fine-print on the websites, the rates shown are not inclusive of the fees that are required by someone, usually a broker, to conduct the exchange with another person or entity.

3. Most websites show a 24-hour average, which can cover a wide range of exchange rates for a given currency.  Most currency transactions are at the instant rate, or “spot” rate, meaning the rate available for the exchange at that moment in time---not a daily average.  The instant, or spot, rates can change within seconds.

At Seven Corners, we work closely within our international payment group to reduce fees.  We regularly process large quantities of payments in foreign currencies, which allows us to benefit from favorable rates, higher volumes, and lower fees.  Even with our partnership with best-in-class foreign exchange platforms, the exact currency rates for claims payments often differ with the popular websites that publish average interbank rates. 

Seven Corners strives to offer a more straightforward and transparent approach to foreign exchange, basing the rate on actual rates, rather than using unrealistic rates or averages. We want to be sure that you’re being treated fairly.

Finally, we want to share three tips we consistently hear from the millions of travelers served by Seven Corners:

1. Plan ahead! Look at exchange rates to get an idea of what you’re going to be paying. If someone wants to charge you 30 EUR for a sandwich and drink, you’ll know if the price is fair!
2. Notify your domestic bank that you’ll be abroad. Most banks will “flag” your account for unusual spending. It’s a great feature if your card is stolen, but not if you’re paying your expenses while out of your home country!
3. Keep it simple. Avoid using travelers cheques and credit card cash advances.  You may likely pay large fees and fines, and vendors may not accept forms of payment not generally used in their locale.  You may also consider avoiding retail exchange kiosks.  The exchange rates can be more expensive than the rates available with your domestic bank.

Wishing you safe and happy travels!

About the Author

Julia Peterson joined the Seven Corners Customer Service team in February 2016. She is known as a writer and photographer, an extrovert, and master of the Rubik’s cube. She works from home in Michigan where she lives with her husband and her orange, half-blind cat, Murphy.

Categories

• Infographics
• Study Abroad
• Testimonials
• Travel Destinations
• Travel Insurance Advice
• Travel Tips
• Weather

Search Posts