Week 17 - Foreign Currency

You know when you travel to another country and you have to get money exchanged? There are a few different ways of doing this. You can do it at the airport, a foreign currency exchange desk or a local bank. This post will be short and sweet but is meant to alert you of how costly it can be to use a couple of these different services.

The key term here is something called 'spread'. Spread is the difference between what someone will buy your Canadian dollars for and what they will sell those dollars for to someone else. Today, the Candian dollar is trading at about $0.95 US. If you go to a bank though, you won't get $0.95 US for every Canadian dollar you give them; you will more likely get $0.935 or something close to that, with the bank taking the difference. Alternatively, if you had US dollars, you wouldn't be able to buy $1 Canadian with $0.95 US at the bank. It might take $0.965. So, what the bank will buy Canadian dollars for is $0.935 US and what they will sell them for is $0.965. That difference of $.03 is the spread.

As with any service, the more competition there is, the better your rates/prices are going to be (the tighter the spreads). This is why the best place to get your money changed is at your local bank branch. They know you can easily visit the competition, so they will be sure to give you something pretty close to 'market rates' ($0.95 in this example).

If you go to the airport, sometimes the spreads will be as much as 10% difference. In this example, the airport desk might only give you $0.90 for your Canadian dollars while selling those Canadian dollars at close to par ($1 US). Can you say 'rip-off'?

If you think the airport is the worst place to change money though, you are wrong. Try visiting some foreign countries (the fact that I was in Italy a few weeks ago is the inspiration for this post) and getting money exchanged at a local 'convenience store'. They would sell me Euros for $1.45 Canadian but they would only buy my extra Euros for $1.19 Canadian! That's a 26 cent spread! Insane.

The moral of the story is to make sure you get all the money you need before you leave home, either from your local bank branch or a major foreign currency trading centre. If you forget, make sure to go somewhere where the spread they are offering is fairly tight. Don't be the sucker that is paying a 10% premium for your money. You may as well light it on fire.

Cheers.