The basics of foreign exchange explained

Before answering the question above, let us first understand why the forex market exist. Whether you know it or not, we are all part of the reason why the foreign exchange market exists. The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged for you to be able to, fill your car with gas, make a ham and cheese sandwich, or invest in Tesla, to use three simple examples.

If you are living in South Africa and want to buy cheese from France because your parents in-laws are visiting and you want “spread to impress”, either you, or the company that you buy the cheese from, has to pay the French for the cheese in euros (EUR). Boom! You just did your part contributing to the existence of the forex market.

The forex market is open 24 hours a day, five and a half days a week. Currencies are traded worldwide in the major financial centres of London, New York, Tokyo etc. This means that when the trading day in South Africa ends, the forex market begins in Australia. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

And here enters the biggest problem for individuals converting in the forex market. THE QUOTES CHANGING CONSTANTLY. Why does the quotes change constantly? Because of the interbank market. The interbank market is made up of banks trading with each other around the world. The banks themselves must determine and accept risks and they have established internal processes to keep themselves as safe as possible and to make money doing it.

The banks make their money on forex by adding service fees or admin costs when converting currencies. For example, Bank A in South Africa speaks to bank B the USA. Bank A contacts Bank B and confirm that they want to convert Rands to Dollars at the interbank rate. Bank A gives the client in South Africa the interbank rate and adds +-5% for admin fees. The client in South Africa converts his Rands to Dollars and pay +-5% of the value he is converting towards admin and service fees. Banks make use of the lack of information and the constantly changing quotes to take a bigger % of the value that is being converted. That is how they make their money.

Forex and winding up of estates.

During a diseased estate where the beneficiary is offshore, they are exposed to the above-mentioned admin and service fees. Let us use an example.

Person X from South Africa dies and leaves an inheritance to his beneficiary living offshore. His beneficiary is living in Australia and needs the inheritance to be converted to Aussie dollars. Should he follow the above-mentioned route, converting his inheritance through the banks, he would pay 5% of his inheritance for admin and servicing costs. If his inheritance were R1million, he would pay R50,000 to convert it from Rands to Aussie Dollars. To avoid paying the 5% servicing or admin costs, there are a few intermediaries that can convert the inheritance for far less. Anything from 0.7% to 1.5% depending on the volume. Do not be fooled, banks have lots of money for a reason.