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Individuals who are regularly sending money overseas often need to purchase foreign currencies on a regular basis. But when the forex market is constantly fluctuating, how does one secure a favorable exchange rate? The answer is by using bids, which are an important tool for taking some of the unpredictability of exchange rates out of money conversion.
Here are some tips on how to place a bid and benefit from managing currency markets.
Bids allow individuals to stipulate a price at which they are willing to buy currency and at the quantity they need. The bid is placed with a foreign exchange provider that will execute the order should the exchange rate hit the desired price. One can also put a "collar" around a bid that establishes a minimum and maximum value at which an order will be executed, says Victor Hinojosa, director of North American Partnerships at Western Union Business Solutions.
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For example, an individual in the U.S. may place a bid for €10,000 euro if the exchange rate lands in a collar of 1.26 to 1.28, which specifies the minimum and maximum price per euro that an individual is willing to pay. This way, individuals can ensure they buy currency at a favorable exchange rate. "You have to be in a situation where you're comfortable with the rates you want to execute on," Hinojosa says.
When considering how to place a bid, timing plays an important role. Generally, individuals should order bids when they anticipate a short-term spike in their favor. These predictions can stem from a number of factors including geopolitical events, economic indicators and natural disasters.
A prediction can also be made based on a currency's correlation with commodities. For example, Canada is a significant oil exporter, so the Canadian dollar is tied to oil prices. If oil prices rise, that will affect the money conversion. One might foresee an increase in the Canadian dollar and place a bid in anticipation. "It really involves you taking a view on the currency," says Brendan McGrath, CFA, corporate risk manager for Western Union Business Solutions.
In addition, a trusted online foreign exchange service can advise individuals on the plausibility of a bid in light of current currency market trends. But McGrath cautions clients to remember that predictions are just that - educated guesses based on the information available. "There are too many unknowns out there for anyone to be certain of any particular move in one direction or another when it comes to currency," McGrath says.
Bids are a convenient way to take advantage of overnight moves in the foreign exchange market without having to watch it constantly, McGrath says.
Since London is the center of the currency market, most trades happen between 3 a.m. and 9 a.m. EST, making it difficult for those living in North America to take advantage of volatility that could work in their favor, Hinojosa says. But by placing bids with a currency provider, the trade is automatically executed at a specified price, enabling individuals to capitalize on market opportunities without having to be awake for it.
While individuals can certainly buy currency through a bank's self-service option, teaming up with an online foreign exchange service that is familiar with one's currency needs can reduce some of the guesswork involved with foreign exchange.
"This is what we thrive on … providing information to [clients] to help them make the best decision possible," Hinojosa says.
Example: 1USD = xx INR
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