THERE are frequent queries on internet auction forums from novice international import and export traders who are not sure how to find out the correct foreign currency exchange rate for their trades. International importers complain about the apparent high foreign currency exchange rate which exporters seem to demand on international transactions. Exporters want to know how to find out what foreign currency exchange rate to quote to foreign importers to avoid losing money on the foreign currency conversion. Here`s a brief explanation of how foreign currency exchange rates work, and why the forex exchange rates quoted by exporters often do not correspond with what appears on internet foreign currency websites and in the financial pages of newspapers.

There are a number of useful foreign currency calculator websites on the internet which will quote you the current exchange rates - for example:

However, you need to realise that these foreign currency exchange rates are a little misleading. They are compromise figures representing a middle price between a "spread" of the buying price and the selling price. A similar single middle price quote system is used for stock market share prices in newspapers and market reports. The actual stock market price will vary according to whether you want to buy or sell a share. And the more heavily traded a share is, the narrower the spread between the selling and buying price. Similarly with foreign currencies. Minor less heavily traded currencies have a larger spread than the more heavily traded major currencies.

And there is a further misleading factor. The foreign exchange currency rates given on financial websites sites and in newspapers etc. are wholesale money market rates used by banks and financial institutions for dealing in very large amounts of foreign currency at a time. As with most commodities, the larger the quantity being traded, the cheaper the price per individual unit, because the dealing costs can be spread more thinly. In comparison, the amount of foreign exchange currency which the ordinary person will deal in represents a very small amount in the scheme of things, and the costs associated with handling such small amounts are correspondingly much higher per "unit". A supermarket chain buying thousands of one item at a time will pay much less per item than a customer at the check out buying in much smaller quantities. So the foreign exchange rates available to the "man in the street" are similarly much less favourable than the currency rates available to those dealing in huge wholesale quantities of foreign currency.

So how much more should you charge over and above the generally quoted middle price foreign currency exchange rates shown in newspapers etc.?

Let`s first look at an example set of money market middle price exchange rate quotes. Here`s a snapshot from the panel of quotes from Bloomberg - the rates on this board are "live" and constantly changing. Consider the rate between the US Dollar and the UK Pound. At the time of writing a rate is being quoted of $US 1.8394 for £1.00 (or 1.00 GBP - Great Britain Pound):

Using this rate, a British exporter converting a UK price of £100.00 into US dollars for an American importer, would quote a price of £100 x 1.8394 = $US 183.94.

Assuming the British exporter accepts that amount of US Dollars, now let`s consider what that British exporter will receive when he presents his $US 183.94 to be changed back into UK £ at his bank, post office or bureau de change. Will he be charged the same favourable foreign currency money market rate which he quoted to his customer? No. Unless he is able to command money market rates, our average small exporter will be charged a much less favourable rate. This rate is called the "Tourist Rate" or the "Retail Rate", which is the rate quoted for relatively small transactions. Look at the tourist currency exchange rates quoted in the "Times"* newspaper in the panel below for the same day, and compare them with the money market rates quoted in the panel above:

Notice the wide difference in the sets of figures from the two panels. The rate which a bank or bureau de change will charge to exchange those US dollars back into UK pounds (the "Bank Buy" rate) is $US 1.966 - not the $US 1.8394 quoted in Bloomberg above.

So how much would our UK seller actually receive in UK Pounds from his bank if he really asked for $US 183.94 from his US buyer? Would he get his £100.00 back? No. So how much has he lost? The amount he would receive at this rate is:

The British Post Office will also exchange foreign currency at tourist or retail rates. On the same day they are quoting a slightly more favourable rate for our British seller- $US 1.955:

As you can see, this rate would give our British seller:

You should therefore remember as an exporter to add on a sufficient % to your selling price to allow for the difference between the money market middle price exchange rate and the exchange rate you will actually be charged - otherwise you will lose money on the transaction. So let us say our British exporter follows our advice and adds 7% to his £100 to make the price he is asking his US importer £107. How will he do? At the Bloomberg rate (which his US buyer can verify online) he would quote his US importer a price of £107 x 1.8394 = $US 196.82 instead of his original $US 183.94. This would give him:

Increasing his export sale price in US$ by 7% gives him £100.11 - a small profit of £0.11, which ensures that he will not lose out on the exchange rate.

While we are only dealing with the actual quoted exchange rates here, remember to also allow for any commission charges which your bank may charge, and for any other costs such as international money transfer charges. Auctionchex has a very reasonably priced foreign currency exchange service.

* At the time of writing, there does not appear to be a direct link to the "Times" foreign exchange rate panel shown above. To reach the current panel click this Times link. In the search box at the top left of the page, enter "exchange rates". Click the "search the site" search button. Scroll down the Search Results pop-up page until you come to an item entitled Exchange Rates with the most recent date. Click the relevant link for the exchange rate panel.

  The currency exchange rates quoted above are for illustration purposes only, and are not necessarily the current rates.