Currency conversion is a type of business that provides the facility of exchanging currency of one country to the currency of another country for example you can exchange dollar to euro or vice versa. Currency converter provides the service of currency conversion. It can be a specialized money dealer who primarily deals in currency exchange business or it can be a bank or any other financial institution that provide this service in addition to their other services. You can also convert your currency on airports, hotels, ATMs or simply use your traveler cheques or credit cards for the purpose. Currency conversion is also named as currency exchange or foreign exchange, forex exchange or simply FX change.
Mechanism of currency conversion works through different rates prevailing in the market. Currency converter buys foreign currency at a rate called buying rate and trades off local currency in exchange. On the other hand, he sells the foreign currency in exchange of local currency at a rate called selling rate. Usually the selling rate is higher than the buying rate this adjusted rate or difference in buying and selling rate is the profit margin of the converter or he can charge commission while providing this service. This conversion transaction is profitable for both the parties as for whom the currency is converted he has to pay less because if this conversion takes place in hotels or airports then he would have to pay more rates than charged by the local dealers.
Currency conversion rates are determined in the open foreign exchange market where buyers and sellers exchange currencies according to their requirements and agreed upon terms. The current rate that is prevalent in the market is called the spot exchange rate. This rate is adjusted by the currency converter to charge his commission of providing the service of currency conversion. Rates are different for different type of currencies like cash (notes) or documentary cash like traveler cheques or electronic payments. Difference in the rate is due to different factors like cash has an issue of security where as other forms have issue of additional time and cost to clear up the transaction. Conversion rate can be floating as openly set by the market mechanism or can be pegged by the government to keep their currency rate stable. For pegging the conversion rate, governments have to take additional measures. Conversion rate is always quoted in pairs like EUR/USD means the Euro and the US Dollar. Exchange rate fluctuates due to economic factors like inflation, industrial production and geopolitical events etc.
In this cyber age, many online programs or softwares called currency converter, are also available that provide up to date information about the currency conversion rates. You simply have to input number of currency units to be converted and choose the two types of currency, one you have and other you want to be converted in. These programs additionally provide you open market rates live, present analysis of the rates and additional information you require for the transaction to be made.
