Exchange Rates
Exchange rates are the relative value of one currency compared to another. The idea is that for goods to be traded effectively across international boundaries, an attempt should be made to find the worth of currencies relative to each other so approximate values can be given to goods. Supply and demand and many other considerations such as confidence in the national government’s policies affect exchange rates.
Purchasing Power Parity
The Purchasing Power Parity (PPP) theory is used to determine foreign exchange rates. A common example used to explain the PPP theory is known as the ‘Big Mac’ Index. If a Big Mac costs $4 in America, and £3 in the UK, the international exchange rate between the dollar and pound should be £3 for $4.
Supply And Demand
If a demand for a currency is greater than its supply, the price of it will rise. Many events can affect the demand for a currency including politics, taxes, stock markets and inflation. Central banks try to keep their currency stable, by buying and selling reserve currencies depending upon current demand.
Tourist Exchange Rates
Tourist exchange rates usually result in the consumer paying more for a currency than the international exchange rate. This is because the business the tourist exchanges their money with charge for the service. They combine the foreign exchange rates and their service fees to ensure they make a profit. Frequently this profit is included in the tourist exchange rate advertised by the money changer, which is why often the exchange rates quoted in banks differ from that printed in newspapers.
A tiered fee system may be in place, with different charges on the exchange rate depending upon the transaction size. Customers should be wary of 0% commission, as it is likely other fees will be involved that exceed a percentage based calculation.
Airport bureaux de change charge particularly high rates for their exchange, due to the fact they have to pay high rent to be in the airport. Passengers also have no other choice but to use these exchanges if they need money for transport, which means prices are higher. If at all possible, tourists should avoid exchanging money at the airport as there will be better deals elsewhere.
Foreign Exchange Rates
Banks generally offer the best rate of exchange to customers, as they base their foreign exchange rate for various currencies on Interbank prices. Interbank exchange rates are the rates bank use when trading large amounts of currency with each other. The price offered by the bank to tourist will be higher than the Interbank rate, so the bank makes money from the transaction.
Banks compete with each other for exchange rate prices, and it is rare for two banks to be offering the same exchange rate and fees. To find the best deal it is recommended that tourist exchange rates are compared between establishments offering currency exchange.
Larger banks with an international presence usually offer better tourist exchange rates than smaller banks. Smaller banks may not be able to process exchanges themselves, and use larger banks or a broker to provide these services. A broker comes at a cost to the bank, and so this is passed along to the consumer.