[Who pays for the delta/increase between the current rate and the increased rate we hope to receive?]
When you exchange your dinar for USD, the bank will verify the authenticity of the currency (either internally or with a vendor) and once the transaction is complete, the bank DOES NOT hold onto it but rather will exchange it again to USD with a foreign exchange dealer in what is referred to as the interbank market.
The bank will set the rate based on the market and demand and will of course take their cut (spread).
The foreign exchange market works through financial institutions, and it operates on several levels with few insurance companies and other kinds of financial firms are involved.
Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.
Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions.
If you sell your dinar back to the broker you purchased it from, they will exchange with a large bank and the above process takes place the same.
As far as who “pays” for the increase, we can’t look at currency exchange as a finite transaction, a “one-and-done” if you will. Rather, it’s an ongoing transaction…
1. You bought the dinar at a low rate (this is the part of investment where the investor makes their money….on the low buy)
2. The value grows (this is driven by the market and no transaction happens in this step)
3. You sell your dinar (you get the gain and the exchanging bank deposits the USD in your account after verifying)
4. The exchanging bank exchanges the dinar with the dealer (thus balancing their “paying” for the initial exchange)
5. The dealer resells the dinar at the current rate (thus balancing their “paying” for the exchange bank’s exchange)
6. The new buyer of the dinar ultimately “paid” for your initial exchange but they also hold the dinar at the new value and can exchange it again as the rate increases. Once they do, they balance what they “paid” for their purchase plus gained a bit since they chose to trade…and on and on it goes from here. [post 2 of 3….stay tuned]
So, in summary, the “paying” for your exchange is passed on and the only entity that would ultimately lose money out of pocket per se would be the investor who was holding the dinar at the time if it would crash in value.
This general rule applies in all levels of investment — buying low and selling high. We just get the benefit of the biggest jump in the difference of the two!
To that point, I personally plan on initially exchanging a certain percentage of my dinar and holding on to the remaining with the hopes of an even greater gain further down the road.
