For many of us the only time we look at exchange rates is the tourist rates in the windows of bureau exchanges and banks. But how are these exchange rates calculated?
The rate you see in the window is the rate which that particular outlet is charging you for its currency and this is based on what they pay which is known as a the interbank rate or spot rate, this is the price that large institutions pay for their currencies.
Before we can understand how high street financial institutions arrive at their exchange rates we must first understand how this “interbank rate” is arrived at.
Put simply the value of a country’s currency is an indication of the health of its economy and the rate is its relative strength towards the comparative currency’s economy. However the mechanism behind exchange rates is a far more complicated one and involves several key factors such as inflation levels, interest rates, trade deficits and political stability that all rely on one another to determine a rate
When looking up currency rates it can seem like another language as there are a lot of acronyms and what are known as “tickers.” A ticker is a acronym for each countries currency. For example USD is United States Dollar, GBP is Great British Pound and EUR is for the Euro.
Once all these Macro economic figures are crunched together and the worlds leading financial institutions have settled on a spot rate and future rates, or interbank rates, these are then charged to the thousands of brokers and money exchanges around the globe. To then add a margin to the rate they add what is known as a “Sell Price” and “Buy Price”.For example a bureau de change can buy Euros at a rate of £1 = €1.20 they will then advertise Selling at €1.10 and buying at €1.30. This means for every £1 you give them you receive €1.10 and for every €1.30 you give them you will receive £1. They make £.10 per pound selling it to you and £0.10 buying it back from you.
In the past money changers would make a margin from the buying and selling of currency but also charge a commission fee on top. This practice is a thing of the past with virtually no companies doing this now, but almost all use the boast of zero percent commissions to make it look like their customers get the best deal. This is the equivalent of a car salesman telling you that he won’t charge a commission but not telling you the price of the car. In practice this is irrelevant as it all comes do to the exchange rate they will charge you, they could be 10% more expensive that their competitors. So compare the rates offered by different companies to see what the best deal.
|Min for delivery||Max delivered||£100 buys you|
|£500* free delivery||£2500||(EUR)108.65|
|£500* free delivery||£4999||(EUR)110.25|
|Thomas Exchange Global Ltd||£100||£2500||(EUR)112.05|