FX bps explained: How Superhero’s currency conversion works

Superheroes who trade on Wall Street may have encountered the term "basis points (bps)", which is often quoted during the process of converting Australian Dollars (AUD) into U.S. Dollars (USD) and vice versa within their Superhero wallet. 

This article aims to better inform you on what basis points are and what it means for investors using Superhero.

What are basis points?

Basis points, often shortened to "bps", is a unit of measure used in expressing changes in interest rates, exchange rates and other percentages used in financial markets. 

One basis point is equivalent to one-hundredth of a percentage point – equal to 0.0001 or 0.01%. An increase from a rate of 3.25% to 3.35% for example represents a change of 10 basis points.

Using basis points provides a more precise way to discuss and compare small percentage changes without dealing with decimals. It's a universal form of measurement used in financial institutions all over the globe. 

When are basis points used in investing?

Basis points are most often used in the context of interest rates, the stock market and in foreign exchange rates. 

As an investor, it is beneficial to familiarise yourself with the concept. 

The following sections illustrate how the term is used in different scenarios. 

Interest rates 

The Reserve Bank of Australia (RBA) often uses the term "basis points" in its interest rate decision announcements, stating phrases such as "the Board decided to raise the cash rate target by 25 basis points" to illustrate an overall increase of 0.25% to the cash rate.

Similarly, a bank may decrease its mortgage rates by 50 basis points. This means that a mortgage rate that was formerly 6.50% would now be 6.00%.

Stock market

Basis points are also used in the context of the stock market. 

It can be used in expressing price changes in stocks. For example, if you read that Apple’s (AAPL) stock price went up by 100 basis points, it means that AAPL’s stock price increased by 1%.

Similarly, basis points can be used in expressing changes in dividend yields. If AAPL’s dividend yield increased by 10 basis points, this equates to a 0.10% increase in AAPL’s dividend yield.

Foreign exchange (FX) rates

In the context of currency conversion, which is the main focus of this article, basis points may be referenced to indicate the margin on exchange rates when quoting conversion fees. 

How are basis points used on Superhero?

On Superhero, the term "bps" when used for quoting our FX Transfer Fee relates to the margin we add to the rate. 

Australian Dollars to U.S. Dollars

If you convert Australian Dollars (AUD) to U.S. Dollars (USD), our FX Transfer Fee (margin) of 65 bps is deducted from the USD rate. If you convert U.S. Dollars (USD) to Australian Dollars (AUD), our FX Transfer Fee (margin) of 65 bps is added to the USD rate.  This means that the amount you receive is net of the FX Transfer Fee.

Example: If you convert A$100 into USD and the current USD FX rate is 0.7500, you will be exchanging your AUD at a rate of 0.7435 after fees. Overall, you will be receiving US$74.35 in exchange for your A$100 after fees.

Superhero’s FX Transfer Fee is calculated as 65 bps in USD per AUD converted and vice versa, however the fee is always presented in your local currency.