Currency valuations change every second.
Add up a whole lot of seconds and you’ll get a whole lot of changes to the exchange rate you see now.
Add up a whole lot of days or weeks and you’ve got currency prices that are vastly different to those today.
A foreign exchange limit order is an instruction to your money changer to monitor these changes for you, day and night, and to convert your money only when the exchange rate reaches a better, acceptable rate for you.
Limit orders must be set with an expiration date, meaning that the money changer will monitor the market for you for a 2-week period, or for a 3-month or 6-month period, as specified by you. Some money changers will allow limit orders for as long as 12-months.
Thomas is sending USD 50,000 from the US to his parents in New Zealand. With the US dollar currently worth 1.45 New Zealand dollars, Thomas’ parents will receive NZD 72,500 if he sends the money today.
It goes without saying that this money transfer is a big deal to Thomas and he really wants it to maximize the benefits to his family. What Thomas would really like is for the money he’s sending to give his parents at least NZD 80,000. To achieve this, he’d need the USD/NZD exchange rate to reach 1.6.
Thomas contacts one of Best Exchange Rates’ trusted partners and places a 6-month limit order to change USD 50,000 into New Zealand dollars at a rate of 1.6.
Through an automated trading system, the money changer automatically monitors the USD/NZD exchange rate and, when in 3-months’ time it reaches 1.6, they convert Thomas’ money (sell USD, buy NZD) and his family receives NZD 80,000.
Limit orders are a powerful tool. In fact, in short-term currency trading such as that done throughout each business day by banks, hedge funds and even by retail ‘forex’ traders, they are the order of choice, being preferable to a ‘market’ order – aka a normal order, or simply accepting the quoted exchange rate or price for any product or service.
Limit orders do, however, come with a fairly significant risk, which you may have already figured out. Simply, your order may never be filled!
In our example above, imagine if the USD/NZD rate rallied to 1.55 at the end of month one, to 1.58 at the end of month three, but plunged to 1.38 by the end of month six, never reaching the 1.6 limit.
In this case, Thomas’ order would never have been triggered, no money would have been changed, and his parents would not have received any money during this time. Perhaps worse for Thomas is the thought that after 6-months of waiting, he can now only change the money at an exchange rate of 1.38, giving his parents only NZD 69,000, which is NZD 3,500 less than he could have given them 6-months ago.
Other disadvantages of limit orders include a minimum transfer size, such as OFX’s minimum size of AUD 30,000 or equivalent.
Limit orders may also be subject to a fee, especially if the transfer provider has a low minimum.
Both companies are experts at what they do, which is to facilitate international payments with minimal fuss and without bogus fees or margins.