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Why am I being shortchanged when buying foreign currency?

Dear Nancy Woods,

I am getting ready to go on holiday to Europe, and when I went to the bank to buy some euros, it cost me more on the exchange than I was expecting. They tried to explain it to me but I didn't understand why. Can you explain?

Signed,

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Sharon

Dear Sharon,

There are various numbers that are used to determine the price that you would be buying euros at from the bank. Let me start with explaining the spot price.

The spot price is the price that the currency last traded at between, in your case, the Canadian dollar and the euro. This spot price is derived from the various market makers around the world and fed to Reuters. That spot price changes frequently.

It is used as a starting point to help banks and other financial institutions set the buy and sell rates. Their rate to buy from you is less than the spot price by an amount called the spread. Similarly, the sell rate is higher than the spot rate. Rates vary between the various institutions that trade currencies, so it is a good idea to shop around.

Sometimes you can get a better rate when you are exchanging large quantities of the currency. The bank makes less on the spread but for a higher value.

If you are looking to find out the exchange rates for a currency, I suggest you go to http://www.xe.com/. They provide the currency data to help websites give you a comparable price in your home currency if you choose. It is helpful to see how much a hotel will cost you in euros, for example, and in Canadian dollars. They also have a great app that I use especially when travelling abroad. The exchange rate they show is updated every minute and is derived from numerous exchange sources.

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Nancy

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.

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About the Author

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. More

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