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Negotiation

Market Participants

  1. Central Bank: It is the regulatory body and can intervene to buy or sell currencies in order to control large fluctuations and ensure market stability - its role will be explored in the next section.
  2. Financial Institutions: Banks, brokers, and exchange houses are the only ones authorized to carry out foreign exchange operations for the public and companies.
  3. Companies: Mainly importers and exporters, who need to convert currencies to pay for products or receive for sales.
  4. Individuals: For purposes such as tourism, maintenance of residents abroad, investments, or receiving funds from other countries.

Floating Exchange Rate Regime

Brazil uses the floating exchange rate system. This means that the price of a currency is not fixed, but is set daily by the law of supply and demand. When more foreign currency enters the country than leaves, its price tends to fall. When the demand for foreign currency is greater than the supply, its price tends to rise. Economic and political factors, both internal and external, directly influence this variation.

Buying Rate

To understand the terms "buying" and "selling," the secret is to always think from the perspective of the financial institution (the bank or exchange house). That is, a buying rate is when the financial institution pays to buy foreign currency from you.

Example

Imagine you returned from a trip and have 100 dollars left. You need to exchange these dollars for Reais. In this situation, you are selling your dollars to the exchange house and, consequently, the institution is buying the currency from you.

Note that in the foreign exchange market there will always be two rates, one for buying and one for selling. Suppose the institution we are dealing with presents the two rates below:

  1. Buying Rate: R$ 5.25
  2. Selling Rate: R$ 5.45

In our example, the applied rate will be the buying rate. So, the exchange house will pay R$ 5.25 for each of your dollars - in the end, you will receive R$ 525.00 (100 x 5.25).

Selling Rate

The logic is exactly the opposite, always from the institution's point of view, it is the foreign exchange transaction where there is a sale of currency to you.

Example

You are planning a trip and need to buy 100 dollars. In this case, you are buying the foreign currency from the exchange house. On the other side of the counter, the institution is selling the currency to you.

Using the same rates from the previous buying rate example:

  1. Buying Rate: R$ 5.25
  2. Selling Rate: R$ 5.45

The applied rate will be the selling rate. You will need to pay R$ 5.45 for each dollar and the operation will cost R$ 545.00 (100 x 5.45).

Difference Between Rates and the Exchange Spread

Objectively, the selling rate is always higher than the buying rate because this difference is what we call the exchange spread, and it is basically the costs and profit of financial institutions (banks, brokers, and exchange houses) in foreign exchange operations.

Think of it like any other commercial operation: the institution "buys at one price" and "sells at a higher price" to be profitable.

Example

  1. You have dollars and want Reais: The exchange house buys your dollars for R$ 5.20 (buying rate).
  2. Another person wants to buy dollars: The exchange house sells the dollars to them for R$ 5.40 (selling rate).
  3. The difference of R$ 0.20 per dollar (the spread) is what allows the exchange house to pay its bills, protect itself from market risks, and, finally, make a profit.

Tax on Financial Operations (IOF)

The IOF is a federal tax levied on various credit, exchange, insurance, and securities transactions. Simply put, almost every time you carry out a financial transaction involving the movement of money through an institution, the IOF is present.

Some examples of transactions and their tax:

Operation IOF Rate
Purchase with international credit card 3.5%
Sending currency abroad for investment purposes 1.1%
Receiving from abroad 0.38%
Import and export of goods 0%