Tourist exchange rates
This topic explains how exchange rates work, how rates are expressed, the smart ways in which a tourist can manage exchange rate risks, trade off exchange rate risk against security risk. It also explains the anti-money laundering laws, such as the Patriot Act, where ample caution needs to be exercised by a tourist. A tourist who had traveled from US to India would have cashed American dollars for Indian Rupees. He would have seen how the exchange rate was transacted. But a variety of factors, far more complex and dynamic, cause exchange rate changes.
Why exchange rates change frequently?
In an economic scenario, where interest rates, inflation, agricultural output, industrial production, and so on, of a country worsens, the value of the country's currency would become weaker vis-a-vis other foreign currencies, say USD or Euro. Even situations of political instability could change the people's perception of the currencies and influence exchange rate. When this happens people holding foreign currency would begin to sell weak currency and buy the currency that appreciates in value.
Exchange rate conventions:
In foreign exchange market, currencies of different countries are traded as commodities. Like commodities, the value of a foreign currency, is also expressed in terms of a domestic currency. The equivalence of one currency against the other, which is expressed in pairs is called the rate.
There are two conventions in which rates are expressed: direct and indirect. An example of an indirect rate is:
1 Euro = Rs. 59.4546.
From the point of view of the tourist who visits India from the US, the Euro which is a foreign currency is to the left of the "=" sign and the Indian Rupee which is a home currency, is to the right.
A direct rate, on the other hand would be :
Rs 59.4546 = 1 Euro.
Here the domestic currency comes first as the base currency and the foreign currency, comes next, as the price currency.
Indirect rates are widespread. It would be enough if the tourist understands indirect rates.
Where to find exchange rates:
One can look up the financial dailies to find the price trend on any day. Every prominent authorized dealer in foreign exchange, such as Thomas Cook, would have interactive Currency Converters installed on their web pages. Converters give results based on data inputted such as purpose of seeking foreign exchange and the number of persons involved. It also gives historic price trends of currencies for the past few months. These rates are indicative. The actual rates can vary within a thin margin of the indicative rates, depending on the actual exchange rate movements in the forex market at the time of the exchange transaction taking place.
How to carry foreign exchange :
A tourist may carry foreign exchange in several ways. With an international card, the tourist may pre-load funds of his home currency, before embarking on a travel, and use it without the hassle of converting it into domestic currency at the money changer every time he needs local currency. Most cards come with security features such as Pin, secret codes and theft insurance, which are safe, even if lost. Ideally, the cards should be of big banks with the backing of a strong credit card company, such as VISA or MASTERCARD. But this method of carrying cash is laden with exchange risk. If the value of the original currency depreciates, he has to pay more of such currency, to buy the same amount of local currency since he had not converted foreign currency to domestic currency immediately upon his arrival. This exchange rate risk can be hedged, if the tourist converts his currency to domestic currency immediately upon his arrival at a foreign country. But the attendant security risk of carrying hard cash offsets the exchange risk.
Travelers' cheque was once the most popular way of carrying foreign exchange. But with the advent of global credit card, traveler's cheques are becoming less popular. But people who hate standing in long ATM queues, or fear getting mugged, still carry travelers’ cheque. These are as good as cash, cashable at the money changer by merely signing in his presence. In case these travelers' cheques are lost, the companies arrange for refunds, in a matter of minutes. But this also carries the exchange rate risk because it gets converted into foreign exchange only at the time of cashing A tourist may not carry his entire holdings in any one form, viz., as cash, or travelers' cheque or card. The tourist would be requiring a certain amount of hard cash for purposes like taxies and tips. A bulk of his payments can be made through card. The tourist should carry a mix of cash, card and travelers' cheques with him.
Exchanging the currency with a friend, without going to an authorized dealer,
is the best way to save on commission.
Avoid blackmarkets:
Banks normally charge higher commission and offer lower rates than money changers. Besides banks insist on elaborate documentation formalities which could upset a tourist itinerary with delays. An intelligent tourist may choose between banks and money changers, and within money changers between ones offering finer rates. But a tourist should avoid black market. Here are the reasons. In countries where exchange rates are managed by Governments, the rates are artificially pegged and adjusted periodically through Central Bank intervention. There is normally a time gap between these interventions, giving enormous scope for black marketers to speculate. Even big financial institutions look out for arbitrage opportunities and switch currencies. The operations of financial institutions, banks, authorized dealers and money changers take place within the regulatory framework of monetary authorities. But the black marketers operate beyond pale of law which is where the tourist should not get involved.
The black market is a place where terrorists, drug traffickers, antique smugglers
and the likes of such people convert dirty money to legitimate money. This
takes place through layers of bank transactions where the original source
gets obscured. The better rates in black market could be tempting to a tourist.
More than the exchange rate advantage, standing in long ATM queues could be
daunting. A hurried tourist may find the ATMs useless and slow. But here is
where the tourist has to be extremely cautious. Black market is serious crime
under anti money laundering legislations. Ever since US brought in THE PATRIOT
ACT, almost every country in the world has replicated the model. The tourist
should not unwittingly get involved in helping such people for the sake of
getting better exchange rates. The penalties could be stiff. A tourist should
therefore confine his operations to the authorized dealer or the money changers.
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