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in this short video I want to look at a part of the financial markets that a lot of people find a bit baffling it's the biggest market in the world it's fast moving its 24-hour and it's packed with jargon but don't be put off because if you're planning a holiday if you're running a portfolio with international investments and all your own assets overseas you do need to get to grips with just the basics at least at the foreign exchange market and it's those basics on a stripped down and have a look at right now so first of all the basics of the structure of the market is a zero-sum game the foreign exchange market so it's a little bit different to the equity market in the equity market you know Tesco can move up or down and independently if say Sainsbury's or other food retailers or the wider market in the currency market things come in pairs so a currency will strengthen rise or weaken fall against another currency or maybe a vascular currencies but the point is it won't move independently and that means the currencies come in pairs so a typical quote might be GBP to use the three let's rap acronyms and against USD you know all that means is you are being told the exchange rate for pounds short GBP against dollars now being so-called base currency on the left hand side there all right and every currency has a three-letter acronym and I've put some of the more common ones up here they're just bear in mind that there are plenty more to reflect all the currencies that are around now basics an exchange rate is simply the price of one currency against another so what's that strengthening and weakening stuff I was talking about just now well have a pound on the left the base currency is currently worth $1 60 the pound would be said to strengthen if it moved to let's say being worth $1 80 conversely that would be the dollar weakening all right we tend to talk about the countries on the left the quote the base currency is that's the pound strengthening equally if a pound only buys one dollar less 40 they're not surprising you talk about the pound weakening or falling weakening for jargon that's generally use all the dollar strengthening converse keep the bond is you always talk about a pound doing something in relation to something else all right now other jargon that's key the previous example used one price that's a little bit unrealistic same as will be in the equity market or the bond market because actually there are two prices at any given point in time there's a bid price and an offer price all right so there's a price which currencies are bought there's a price which currents is sold and the difference is called the spread and that can be relatively wide or relatively narrow now we'll look at an example of that in just a moment but just be aware there are also two basic rates in playing the foreign exchange market we look at both briefly here there's the rates applicable for a deal now today's rate so called spot rate and there's the rate agreed now but applicable at some point in the future that's called a forward rate both briefly in this short video right so let's turn that into a practical example so very straightforward example you want to change 1,000 pounds into US dollars you are presented with a quote that looks something like this first of all you've got those three-letter acronyms alright gbp/usd let's that just says you're being told the rate okay four pounds in two dollars it's a basically a two a two price exchange rate and that is one sixty seven 90 on the left one sixty seven ninety three on the right so there is a gap between the bid and the offer price and the gap is the spread not very much in this case also know that the price on the right which is in dollars basically is quoted to four decimal places and that's quite common sometimes you see five now what does this what does this mean then do you want to change a thousand pounds into US dollars well there's your bid price on the Left there's your offer price on the right and there's a important thing to remember here these are quotes if you like from the bank or currency service providers perspective so our on the left hand side of this quote that's the rate of which the bank if you're using a bank buys sterling and that's the price at which it sells sterling literally offers it so just to wrap up the example if you want to sell factory a thousand pounds the bank's going to buy it at one sixty seven ninety and hand you ignoring Commission one six seven nine dollars are not very straightforward example so just make sure as you would have to in the equity market the bond market you're looking at the the right side of the two-way quote now so far so good but I didn't mention there were forward deals to us just a basic spot deal so you're gonna remit 500,000 Aussie dollars this time from the sale of an Australian property in six months time back to the UK all right now what are your choices you could simply wait and see what $500,000 dollars is worth in sterling when you eventually remit it back to me you gave your problems this the exchange rate sterling Aussie dollars could move over the next six months and we'll look at what might move the exchange rate in just a moment you don't know for sure what that's working sterling you know you're getting five hundred thousand Australian dollars when you don't it's why it's worth it sterling so an alternative is to approach your bank or currency service provider now and say give me a rate give me literally a forward rate as a griot rate now at which we will convert that $500,000 dollars when it comes in so you could hey chas it's called flash waves of saying you could protect yourself by selling your are two dollars forward and notice something here okay let's do a quick comparison let's imagine you were you were changing the $500,000 dollars into sterling right now at the spot rate notice I'm saying that would be worth around two hundred seventy eight thousand one hundred eighteen pounds but if you're going to do it the forward rates you were agreeing that right now what it means is when you remit the $500,000 you will effectively sell them to a currency bride or bank and they will give you sterling they will give you to 75043 why is that that's not as much as a bit less okay well that reflects the fact that a moment time is shooting this video interest rates in Australia are higher and interest rates in the UK so someone who switches Aussie dollars now and banks the money is going to be earning less interest over the next six months and someone who hangs on to Ozzy dollars and that's reflected in those amounts okay you get a bit more now for switching back into sterling where you learned a low rate and keeping the Aussie dollars okay and switching in six month time because in the mean time you can earn a bit more interest all right so just bear that in mind it leads me on to a point on the very last slide but before we get there is that the only use of forwards well no there are lots of use of currency forwards and we imagine you're a UK firm you export goods to the US to Africa over to the Far East and so on and as you do so you invoice in the local currency so your American customers want to be invoiced in dollars not sterling your African customers we invoice in the local currency not sterling same VFR Eastern customers your problem is in the future because people take a while to pay you're gonna have receipts coming in of cash a man's in all sorts of different currencies and you have no idea what they're gonna be worth because it depends on the exchange rate and what happens to it in the meantime for the point where you actually invoice the point we receive the cash well forwards are a great way to solve the problem for a company they can basically strike a deal that covers your provider or bank to sell amounts of a particular local currency forward locking in the exchange rate back into sterling okay gonna wrap up the point I mentioned just now on the previous slide what therefore moves exchange rates long term it's interest rate or in strain expectations essentially imagine you've got a situation wearing one currency you can earn 1% on the deposit in another currency you can earn 10% having that currency on deposit people again a tend to think what's looking good I mean there may be more risk over here but you know 10% that's attractive so that is gonna tend to strengthen the currency is offering the higher interest rate alright and as interest rate expectations change so the exchange rate will tend to shift in anticipation but that's kind of the medium long-term picture in the short-term almost anything can move an exchange rate you'll see this happening as data's released relevant to a particular economy like the UK economy it will move sterling whether that's jobs data growth data okay it could be some political event anything that could influence the underlying economy can influence the exchange rate can influence the currency so just bear that in mind all right so there you have it hopefully a quick tour to basic foreign currency jargon the difference between a spot on a forward rate and a very brief tour of the kinds of things that can change an exchange rate you