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Asking for directions. Getting help with translations. Inquiring about nearby restaurants. When you’re in a new place, asking for help comes with the territory. But when it comes to international business, it isn’t always a wise idea to depend on others.
“If you work with someone internationally and they get the impression you don’t know what you are talking about regarding international business dealings, they may try to take advantage of your lack of knowledge, and try to get you to pay for freight, import fees, etc. These are usually taken care of by the importer, but they may say, ‘Our government requires your company to pay these fees,’” says Andy LaPointe, managing partner and owner of Traverse Bay Farms/Fruit Advantage, a fruit company in Bellaire, Mich., that sells to China, Japan, the United Kingdom, Australia and New Zealand.
By teaching yourself how to read a foreign exchange chart, you can better understand currency values and gain more control over your business transactions overseas. Here are five tips to help you read foreign exchange charts (fx charts) like an old pro.
When a currency is quoted, it is done in relation to another currency. Take the example of EUR/USD. The first currency, or the currency to the left of the slash, is called the “base currency,” and is the currency that someone is trading (i.e., buying or selling). The second number is called the “quote” or “counter currency.” For example, the EUR/USD currency pair means the EUR (euro) is the base currency and the USD (U.S. dollar) is the quoted currency. That means if the stated exchange rate on any particular day for the euro is 1.237, a buyer will need slightly less than $1.25 in U.S. currency to purchase €1 euro. Or, if a currency pair is read USD/JPY 220.50, that means $1 in U.S. currency equals ¥220.50 Japanese yen.
A “direct quote” is when the currency pair uses the domestic currency as the base currency. An “indirect quote” is when a currency pair uses the domestic currency as the quoted currency. If you’re looking at the U.S. dollar as the foreign currency, a direct currency quote would be CAD/USD 0.72, which means $1 Canadian dollar would purchase 72 cents U.S. For an indirect quote, USD/CAD 1.21 means that $1 U.S. dollar will purchase $1.21 Canadian dollars.
Every currency pair has a “bid” (buy) price and an “ask” (sell) price. When buying a currency pair, this is called “going long,” and shows how much needs to be paid to purchase one unit of the base unit. When the bid price is used for selling a currency pair, this is called “going short,” and shows how much the market will pay for the currency quote in relation to the base currency. For example:
· If you see USD/CAD 1.3400/07
· The bid price = 1.3400
· The ask price = 1.3407
· You can buy $1 U.S. dollar with $1.3407 Canadian dollars.
This is where a currency quote is given without the U.S. dollar as one of its components, including EUR/GBP for euros and British pounds, or EUR/JPY for euros and Japanese yen. This isn’t done as frequently, since the U.S. dollar is the international reserve currency.
The difference between the bid and ask price is called a spread. A pip is the smallest amount a price can move in any currency quote. For example, for the quote, EUR/USD 1.2700/05, the spread would be 0.0005 or 5 pips, which are also called points.
Familiarizing yourself with these five basics of a foreign exchange chart (fx chart) makes it easier to see the value of one currency relative to other currencies. Having a firm grasp on currency values is vital to making smart decisions about international business transactions.
Example: 1USD = xx INR
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