The Fine Art of Managing Foreign Exchange Transactions
By Jason Mugford
 
In his insightful article ‘Art as an Alternative Asset Class’, Kevin Radell wrote about the “cordial disagreement” concerning price issues at the April 7 symposium held at Christie’s New York and the ageless admonition ‘caveat emptor’.

In the foreign exchange world, incremental savings in all currencies can translate into thousands of dollars for buyers and sellers of art. So, we should really add a second warning: ‘caveat venditor’.

Although there are many inefficiencies in the art market, one variable that is within the control of art dealers, curators and collectors is managing the foreign exchange cost of a cross-border transaction. International art transactions will continue to increase as access to data and dealer networks become essential tools to facilitate global art merchandising. Those who understand the foreign exchange market mechanism enjoy a competitive edge by prudently navigating the least cost alternatives.

For any international merchandising transaction, an exchange of currency is ultimately required at one exchange rate or another. In most cases, parties must convert either their home currency to another currency when buying objects located abroad, or convert another country’s currency to their own when selling. Foreign Exchange, or “FX”, adds risk to both the seller and the purchaser because the “price” of various currencies changes constantly - every eight seconds around the world. Although this is the reality of the FX world, many do not realize that there are ways for those outside of the banking insiders club to minimize costs and maximize profits by managing the price of the currencies involved in the transaction.

At the end of the day, the best rate possible will be in the interest of both buyer and seller, since the FX exchange is a cost of the transaction and all costs affect negotiations. Most people who complete an occasional foreign exchange transaction, simply call their bank and accept the going rate. At best, they shop among banks for a better rate. For individuals and non-banks, this is the “retail” segment of the FX exchange market. Functioning in the retail segment adds a considerable amount to the cost of the currency exchange since banks take a sizable ‘spread’ on the rate that they offer their retail customers. They may also charge annoying transaction fees for doing the paperwork.

One way to ensure the best possible rate is to look outside of retail market to the “interbank market” where bank-to-bank transactions occur at razor slim spreads on high volume, and where certain financial institutions, whose sole business is foreign exchange transactions, function in the FX market. Such companies do not require middlemen or banking agents, and also benefit by having low overheads. They can therefore generally provide a much better exchange rate than the banks for both retail and institutional customers. Good customers often benefit from a waiver of transaction fees as well.

There are other, less obvious advantages in establishing a relationship with a dedicated foreign exchange specialist. Market intelligence relative to current and projected currency movements provides invaluable information that facilitates sound planning on when to purchase or sell a foreign currency, thus maximizing the efficiency of one’s existing reserves. For example, a buyer with American dollars at a London auction would know the date of the sale and should have a planned budget. Consulting with a FX specialist prior to the auction could save substantial sums, even for relatively small transactions, since the dealer should have access to the most current thinking from currency traders around the world.

A dedicated FX dealer will also ensure that you or your beneficiary receive the correct amount in the shortest period of time. This service is something that sounds simple but is rarely delivered by many FX providers.

For these reasons, collectors, dealers and merchandisers of fine art have the often-overlooked option of managing the FX component of an international art transaction. By working with a reliable foreign exchange specialist organization, one can gain control of exchange rates and minimize the overall costs associated with global art commerce.
  Custom House
 
 
Custom House Global Foreign Exchange is a proud sponsor of artnet. Established in 1992, Custom House handles $10 billion each year in transactions for some 45,000 clients through its 83 offices in Australia, Canada, Italy, New Zealand, Singapore, the United Kingdom and the United States. For additional information please contact artnet@customhouse.com and visit us at www.customhouse.com.