What Is Foreign Exchange?
Foreign exchange is the process of exchanging one country's currency for another.
Travelling to another country
You travel from New Zealand to Australia. New Zealand uses NZD, Australia uses AUD — you may need to exchange some NZD into AUD to spend money there.
What is an exchange rate?
An exchange rate tells you how much of one currency you get in exchange for another. Real exchange rates change constantly — this is just a deliberately simple example.
Why exchange rates change
Currencies can become stronger or weaker relative to each other because of supply and demand, interest rates, economic conditions, and events affecting a country. There isn't one single reason — lots of things play a part.
Exchanging currencies isn't free. You may encounter exchange-rate differences, fees, and commissions — so the amount you receive can be less than expected.
The same money, a different amount
You have NZ$100. You exchange it before a holiday. Later, the exchange rate changes — so the same NZ$100 may buy a different amount of foreign currency next time.
Packing for a holiday
You're going on holiday with NZ$50. You need to buy some Australian dollars. Why can't you simply use your NZ$50 everywhere?
Different countries use different currencies — shops in Australia are set up to accept AUD, not NZD, so you need to exchange your money first.
Travel exchange vs trading
Exchanging currency for a holiday is different from speculative currency trading — buying and selling currencies hoping to profit from rate changes. We'll look at trading properly in the next lesson.
Children often encounter foreign exchange when travelling — a great opportunity to explain exchange rates using real currency, rather than introducing trading.
Where to next
More on money and risk.