From the previous post, we delved into some background on the FOREX market. It was the nuts and bolts of trading one currency for another.
So how exactly do banks and currency trading posts make profits exchanging YOUR money?
Let's get to it..
So how exactly do banks and currency trading posts make profits exchanging YOUR money?
Let's get to it..
How Do These Guys Make Money Changing Currencies?
Now this is where it gets interesting.
It’s called the spread.
You’ve gone on your trip, bought a bunch of great Easton synergy hockey sticks and head back to the states with some leftover cash in hand.
Say $1101.10 CAD left over.
Originally, that cost you $1000 USD to get.
You head to the bank or currency exchange and you want to sell the remaining Canadian dollars, because what good is that colourful, Canadian funny money to you in California.
In reality, the exchange rate changes almost every second. But, let’s assume that it doesn’t change for the duration of your three-day trip.
You come back with that $1101.10 CAD and want to exchange it back into American currency. It should be worth $1000 USD, right?
Wrong.
Now this is where it gets interesting.
It’s called the spread.
You’ve gone on your trip, bought a bunch of great Easton synergy hockey sticks and head back to the states with some leftover cash in hand.
Say $1101.10 CAD left over.
Originally, that cost you $1000 USD to get.
You head to the bank or currency exchange and you want to sell the remaining Canadian dollars, because what good is that colourful, Canadian funny money to you in California.
In reality, the exchange rate changes almost every second. But, let’s assume that it doesn’t change for the duration of your three-day trip.
You come back with that $1101.10 CAD and want to exchange it back into American currency. It should be worth $1000 USD, right?
Wrong.
When you sell back your $1101.10 CAD, they will buy it from you for less than what they sell it for. So you’ll get something less than $1000 USD
When you look at the table, the Royal bank buys the Canadian back at a rate of 0.8934
So multiply 0.8934 x your $1101.10 CAD = $983.74
(Note, the rates for conversion from Canadian dollars to US dollars were not available at the VBCE site at the time but rest assured, you would’ve gotten back less than your initial $1000 US. Not as bad as the $983 the bank gives though).
The spread is simple and can be seen below. The VBCE buys a single US Dollar for $1.0808 Canadian and sells it for $1.1011 Canadian.
When you look at the table, the Royal bank buys the Canadian back at a rate of 0.8934
So multiply 0.8934 x your $1101.10 CAD = $983.74
(Note, the rates for conversion from Canadian dollars to US dollars were not available at the VBCE site at the time but rest assured, you would’ve gotten back less than your initial $1000 US. Not as bad as the $983 the bank gives though).
The spread is simple and can be seen below. The VBCE buys a single US Dollar for $1.0808 Canadian and sells it for $1.1011 Canadian.
The spread is 1.1011 minus 1.0808 = 0.0203
What does this mean? For every one dollar of currency exchanged, this outlet charges 2.03 cents for the transaction, or just over 2%!
That’s their take on every dollar exchanged – 2.03% to be exact for all the OCD purist mathematicians that send me corrective email.
And now you know how banks and currency exchanges make money on changing your money.
They have to pay the rent, keep the lights on and pay for the electricity used by the money counting machines somehow.
Key Takeaways and Tips:
What does this mean? For every one dollar of currency exchanged, this outlet charges 2.03 cents for the transaction, or just over 2%!
That’s their take on every dollar exchanged – 2.03% to be exact for all the OCD purist mathematicians that send me corrective email.
And now you know how banks and currency exchanges make money on changing your money.
They have to pay the rent, keep the lights on and pay for the electricity used by the money counting machines somehow.
Key Takeaways and Tips:
- Shop around when exchanging currency. Major banks and outlets at an airport or train station will give you the worst exchange rates.
- Boutique currency exchange shops that often buy & sell precious metals often offer the best rates
- The more transactions you make, the more you lose due to the spread. Keep your transactions at a minimum. Once when you leave the country, and once when you come back – if you can help it.
- Major credit cards such as VISA and MASTERCARD offer very competitive currency rates. Much better than most major banks. If you have to make transactions, don’t pull out more cash. Use your major credit card.
- Always do your diligence to check rates for different outlets. If it seems like a burden, you’re going to be had. If you’re cool with that, then go right ahead. Eventually it becomes routine to have a quick check and you’ll save yourself hundreds, if not thousands of dollars over the course of a few years. Nothing to laugh at
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