Don't pay retail rate for forex investments

As someone working in the financial sector, its an open secret that spot forex rates are quoted with a spread of 5 points or less (sometimes tightening to as much as 2-3 points on USDJPY trades).

The cash rate, of course, is much another matter. If you've been to a retail money changer, you would have noticed that the spread on the rates are anywhere between 150 to 200 points, ie. looking at differences between the 2nd decimal place instead of the fourth (USDSGD 1.5250-1.5450 instead of 1.5325 - 1.5330 <==notice which decimal changes!). You pay SGD1,533 for USD 1,000 compared to SGD1,545 in the lattter case. Buy USD10,000 and the difference will be more than SGD 100.

The common understanding on this is that the huge spread is to compensate the money changer for holding cash and to take into account the almost miniscule amounts we exchange for holidays compared to the trillions traded in the markets everyday.

So much for the introduction; my post today does have a point. If you're looking to buy foreign currency banknotes for spending in another country on holiday, then there pretty much isn't much choice. But, if you were looking to buy a foreign currency to earn a better yield or to speculate on the direction of the currency, then 200 points would be absolutely suicidal (200 dollars for every 10,000).

There are 2 better ways to do this. If you're hoping to get into a higher yielding currency to earn a higher fixed interest rate, get sufficient funds and sell a put option on the currency you're holding against the one you're looking to get into. Not only do you get to select the rate you're getting, you will also be earning a good yield or option premium on the 2 week or 1 month period prior to the option expiry. Some banks may offer a dual currency investment if you place a certain sum with them, eg. 50,000.

To speculate on the direction of a currency, or to take a more adventurous position in earning the interest rate differential, one could consider trading on a forex trading platform. Beginning amounts start from USD 500 to open an account, and positions are leveraged up to 200 times, significantly enhancing the potential for returns. Of course, one should pay attention to the risk, and never risk more what you're prepared to lose.