[This week’s guest post is from Peter Lavelle, Pure FX.]
In this post, I want to tell you how you can check if the foreign exchange rate you’ve been offered is good or not.
1. Find the interbank exchange rate.
To find out if your exchange rate is good, the first thing you need to do is find what’s called the interbank exchange rate.
This is the exchange rate at which banks transfer billions to each other every day. It’s therefore as close as you can get to an “official” exchange rate, and it’s what you need to compare your exchange rate against.
To find the interbank exchange rate, go to www.Bloomberg.com, select “Market data” from the navigation menu, and then click “Foreign exchange rates” under currencies.
Here, you’ll be presented with a table listing the most important exchange rates. What you need to do is find the currencies you’re exchanging.
Once you have, the number you see (in blue) will be the existing interbank exchange rate.
2. Work out how close your exchange rate is to the interbank exchange rate.
Once you know the interbank exchange rate, you need to work out how close your exchange rate is by comparison.
This is because, the closer your exchange rate is, the closer you are to the best possible exchange rate at that time.
Now, your exchange rate will always be below the interbank rate.
What that means is, if the pound buys 1.20 euros on the interbank, your exchange rate will always be less than 1.20.
However, the closer it is to 1.20, the better.
This is because, if the interbank exchange rate is 1.20, that’s the best exchange rate there is at that given time. You can’t do better.
In short then, a good exchange rate will be as close to the interbank exchange rate as you can find!
About the author
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