Finding typical exchange rate "spreads" for currency A and currency B in country B?

Finding typical exchange rate "spreads" for currency A and currency B in country B? - Gold bitcoin coin on background of growth chart

Sometimes when travelling through more than a couple of countries you can end up with currency from a country you visited earlier that has a lousy exchange rate in your current country due to a wide spread but might have a good rate / narrow spread in a country you intend to visit.

I'm wondering if there are some tips for finding out typical exchange rate spreads for various currencies in various countries?

This is my question, below follows my current example, but please don't submit answers that just address the example since I want to know general methods. And of course I realize rates vary in many ways from place to place, bank to bank, etc.


For example I'm left with about $250 worth of Malaysian ringgit in Thailand that I didn't change at the border because I thought I'd be in Bangkok later. It turns out that to change this money to baht in the non-tourist places I've been in will cost about $20 even though spreads for currencies like US dollars are very good.

So I'm wondering if there's a way to see what kind of spread to expect in Laos or China or Burma or Cambodia where I'll be in the coming months and could change my ringgit for the local currency.



Best Answer

FX spreads will be tight in venues where the currency pair has liquidity, and will be wide where the pair is less liquid. As a general rule, currencies are most liquid in their home country and if you are holding MYR and want THB, you will can expect narrow spreads in Malaysia or Thailand, and wider spreads as you move farther away from those venues.

The MYR/THB spread in China, for example, will be wider than Thailand, but the actual value relies upon interest rates in the two countries, the volatility of the currency pair, and the prevailing conditions in the domestic markets in China. Plus MYR is a so-called 'exotic' currency, which means there are only a few houses willing to even deal it, much less publish prices. So it's an unknown, and in those cases the best predictor of what the spread will be tomorrow is what it is today.

Mark Mayo wrote that you can look at what the MYR/THB spread is for other venues simply by getting a newspaper or looking on the net. That will tell you if MYR/THB is more liquid in Laos, or China, or Burma. Also you can look at research from one of the large houses that publish research. But remember that whenever a bank discovers that it can purchase THB in China and sell it in Thailand for a profit (venue arbitrage), they execute it through their branch offices and the opportunity only lasts for a few moments.

Beyond that if you want to try something more sophisticated, you can take your question to https://quant.stackexchange.com/questions. The tags would be 'fx' https://quant.stackexchange.com/questions/tagged/fx and 'exotics' https://quant.stackexchange.com/questions/tagged/exotics




Pictures about "Finding typical exchange rate "spreads" for currency A and currency B in country B?"

Finding typical exchange rate "spreads" for currency A and currency B in country B? - Roll of american dollars tightened with red band
Finding typical exchange rate "spreads" for currency A and currency B in country B? - One dollar banknotes placed on table
Finding typical exchange rate "spreads" for currency A and currency B in country B? - From above closeup one US dollar bill placed on table with front side up



How do you calculate exchange rates between countries?

The formula is: Starting Amount (Original Currency) / Ending Amount (New Currency) = Exchange Rate. For example, if you exchange 100 U.S. Dollars for 80 Euros, the exchange rate would be 1.25. But if you exchange 80 Euros for 100 U.S. Dollars, the exchange rate would be 0.8.

How do you calculate currency conversion rates?

If you know the exchange rate, divide your current currency by the exchange rate. For example, suppose that the USD/EUR exchange rate is 0.631 and you'd like to convert 100 USD into EUR.To accomplish this, simply multiply the 100 by 0.631 and the result is the number of EUR that you will receive: 63.10 EUR.

How do you find the cross rate between two currencies?

So, to recap, the master equation for calculating cross currencies is as follows: Currency A / Currency B = (Currency A / USD) x (USD / Currency B) And to swap over a currency pair into its reciprocal pairing, you have to divide the bid price by 1.



Level I CFA Economics Reading Summary: Currency Exchange Rates




Sources: Stack Exchange - This article follows the attribution requirements of Stack Exchange and is licensed under CC BY-SA 3.0.

Images: Ivan Babydov, Karolina Grabowska, Matthias Groeneveld, Matthias Groeneveld