Why is it that when I go to a foreign currency exchange rate counter I never get the rate that I see on the news?

You may well think that you are being ripped off, but it is not always the case. In simple terms what you see on the news or in the paper or on yahoo finance is the Middle Rate or mid-rate. Some people want to buy a currency and some people want to sell a currency. There is a gap between the price at which you buy and the price at which you sell. In market terms this is normally called the ‘profit spread‘ or just the ‘spread’.

In the financial markets registered foreign exchange dealers normally deal in amounts of greater than \$1m. So unless you are looking to buy or sell more than \$1m you won’t be able to access the very fine ‘spreads’ that the foreign exchange dealers can exchange their currency. If we take a common exchange rate the AUD to USD exchange rate this is expressed as \$1 AUD = \$0.78 USD or an exchange rate of 0.7800. To give you an idea the normal spread between the buy rate and sell rate is 5 points ie you might Sell AUD at 0.7800 and Buying AUD at 0.7805.

When it comes down to small businesses or an individual looking to exchange foreign currencies – the spread we get is a lot different. If you look at the average bank they are giving you a spread of around 400 points! Or to compare that to the example above you would Sell AUD at 0.7600 and Buy AUD at 0.8000. As you can see these rates are vastly different. Does it really matter?

Well if you take an amount of \$10,000 AUD and you convert it to USD the additional cost of the size of the spread is roughly as follows:

 Spread Amount Approximate Cost 5 points or 0.0005 \$6.60 50 points or 0.0050 \$66.20 100 points or 0.0100 \$131.50 200 points or 0.0200 \$260.00

So if you can save a 200 point spread then you can save up to \$260 when exchanging money!

At Best Exchange Rates we show you the rates that you really get not just the mid-rate that is displayed on the TV or in the paper. This allows you to make real decisions about where you can get the best exchange rates and get better value.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.