The Foreign Exchange Process - An Overview

This overview is targeted at those who are unfamiliar with the deliverable foreign exchange (FX) process. For the overview, we will assume that you are a business in New Zealand and need to pay a supplier in Japan. Your supplier requires you to pay her in Japanese Yen (JPY). This is just an example - you can buy and sell a variety of currencies using Elldridge Lynch, and send funds to many different countries. In many cases, you might simply want to transfer your money between your accounts in different countries.

The Basic Process
Every foreign exchange transaction involves the buying of one currency and the selling of another. To make the payment to your supplier in Japan, you will need to buy Japanese Yen from Elldridge Lynch. Given that this example assumes you are in New Zealand, you will most likely want to trade New Zealand Dollars (NZD) for the Yen. Thus, you will sell New Zealand Dollars to Elldridge Lynch. Following payment of your NZD, Elldridge Lynch then pays your supplier in Japan as per your instructions.



Spot Contracts
The most common type of deliverable FX transaction is a Spot contract. When you need to buy currency immediately, and at the prevailing market rate, you enter a Spot contract with Elldridge Lynch. You can also enter a Forward contract, or place an Order to attempt to benefit from favourable market movements. Forward contracts and Orders are discussed in a later section.
Your supplier has invoiced you for ¥250,000. To determine how much this will cost you in New Zealand Dollars, you log in to the Elldridge Lynch online trading platform to request a live rate. You specify that you need to buy JPY 250,000 and that you will be selling NZD to pay for the Yen.

In this example, the rate offered is 74.84 Yen to each NZD, meaning that the ¥250,000 will cost NZD$3340.46. You can sit and watch the offered rate move with the market. The value date for the contract is the date on which the contract will be executed and depends on the means by which you will be paying the sold currency to Elldridge Lynch. Typically, the spot date is two trading days in the future.
If you are happy with the rate and decide to proceed, you then enter a spot contract with Elldridge Lynch. At this point, you can specify how the purchased currency is to be disbursed. You might choose to hold it in your JPY account with Elldridge Lynch, or you might choose to disburse some or all of the funds to a nominated beneficiary you have created earlier (you can also create a new beneficiary at this stage). The beneficiary bank details are specified when you create the beneficiary. Given that you need to pay your supplier in this example, you will either select them from the list of available beneficiaries, or create them as a new beneficiary and specify that they are to receive the entire proceeds of the contract.

Your account balances are updated to reflect the current transaction. Your sold currency account (NZD) will be debited, and your purchased currency account (JPY) will be credited (if you held the funds on account, they will not be available until the contract is settled).

Settling a Contract
At this point, you need to settle the contract by submitting the amount of the sold currency (NZD$3340.46) to Elldridge Lynch as per the specific instructions on the contract. All the details you require, including the bank name, branch, and account number are found in the settlement instructions section of the contract.
Forward Contracts
Forward contracts are similar to spot contracts in that the transaction is executed at the prevailing market rates. The difference is that the value date of the contract might be weeks or months in the future. You specify the forward value date when you request a rate for a forward contract. Forward contracts also typically require that a US Dollar equivalent minimum is met (usually about USD$15,000).
When you enter a forward contract, a percentage (typically 10%) of the value of the contract is to be paid immediately, while the balance is paid one trading day before the value date of the contract. Disbursement of the contract proceeds is the same as with spot contracts.
Orders
To attempt to benefit from favourable movements in the market, or to mitigate losses from unfavourable movement, you can place a trade order with Elldridge Lynch. Using our online facility, you can identify current market rates and determine the saving or cost involved should the market reach the order rate you specify.

The orders you place are monitored by Elldridge Lynch and are automatically executed if the market hits the nominated rate. The order management facility we provide allows you to amend or cancel orders as you desire during trading hours.
Further Information
If you do not have an account with Elldridge Lynch and would like to experiment with our online platform, you can register for a demo account here. Registration for a demo account takes less than 5 minutes and allows you to begin experimenting with our platform immediately