Banks - Foreign currency

Discussion in 'Economics' started by wireswitch, Feb 10, 2007.

  1. Hello everyone, I am looking for some information.
    I would like to know if there are any limitations on banks buying foreign currency to serve the needs of their clients.
    Specifically, can banks in Europe buy and sell USD whenever they want at the market price?
    The reason I am asking is because many banks in Europe use a fixed exchange rate determined at the beginning of the day and then apply a spread to that rate. So if someone in Europe wants to wire USD to the US they pay not only the wire commission but also a 0.5-1% spread in the EUR/USD (unless the currency moves considerably against the bank). If it is possible for banks to buy whenever they want at the market price, why do they not buy and sell for their clients' transfers at the market price? I am aware that they make very big profits through this spread, but if for any reason they have no choice ( European Union regulation?) then there is no point in me complaining.
    I hope someone knows or can help.
    Thank you very much.
  2. That's how they make their $$ - on the spread.

    Your $1000 is chump change to a market that deals in a $10 million USD minimum entry amount in the interbank market.

    Pass along the savings to the customer? Really, what WERE you thinking?
  3. ahhhh.....fixing.....

    no prob...welcome to non speculating currency trading...

    At the fixing time large exporters get their screwing...

    its up to the speculators to find out the desk agenda and what big hedge they are trying to manipulate (run up or down b4 fixing time)...

    Ok i gotta go now...someone is trying to kill me.
  4. But can banks buy foreign currencies at the market price whenever they want?
    I understand that they charge a fee for converting when the operation is the conversion itself which you request from the bank. However, when you have an account in one currency and request a transfer in another currency, you are charged the transfer fee plus the conversion fee. This is what sounds unreasonable to me, since both these fees are by themselves quite high, you end up paying 1-2% of the amount you want to transfer. This happens in some European countries I don't know how it works in the US, but my question was, if banks can buy at the market price with no ( or minimal) expense, then should they not do so for transfers and charge only the transfer fee?
    If they do not say that they are applying a spread when one requests a transfer, then it seems incorrect to do so.
    Also, why do they use the fixed rate plus a spread? Why not use a spread on the market price at the exact moment they are doing the conversion? That way they would never risk the rate moving against them by an amount greater than the spread which they charge, thereby losing money.
  5. Don't worry with THEIR CURRENCY RATES TO YOU.... as Profit-making captalistic stockholder companies they will not lose money while risking the conversion at prevailing COMPETITIVE market speculation rates.

    bANKS HAVE A RIGHT TO MAKE MONEY...NOT YOU. What their dealing desks do with your money is NONE OF YOUR BUSINESS

    Welcome to America...welcome to Capitalism. Banks are not government owned/controlled social offices here...The only requirement they have is to publish their consumer rates...usuary can be legal..

    Thomas Cook ...American Express...blah blah blah...laugh at you...

    HeHe..go visit the money changer on the corner in Tijuana...err uhhh...i mean the Retail Forex market :)

  6. OK. Here is the argument as it was explained to me about 20 years ago.

    Because retail forex (amounts under $100,000) is so small, the Thomas Cook or American Express or whoever needs to collect those positions together until the end of the day (or realistically the next morning) so that they can hedge their positions by converting into the home country currency. Remember that $10 million is necessary to gain entry into the interbank market - while your $500,000 is a lot to you, its not a lot to an FX dealer. On a five pip spread (0.0005), a half a million dollars gives you only a $192 profit potential and is therefore hardly worth your time.

    In other words, spot EUR/USD is 1.30. The spread at your local friendly foreign exchange office is 1.3250/1.2750. They buy and sell at that rate, and make the spread. Eventually they end up with some sort of position, which they need to square up. If the position is small, they will just let it go and make the money on the spread. If the position is large, they will access the interbank and square it up.

    Now, as everyone knows in the FX world, every once in a while you get some sort of change in interest rates, political coup, war, or just massive speculation that moves the market in a significant fashion. In other words, maybe you dealt at that 1.3250 value but the market moved 5 big figures and now it is 1.3500. That's the risk the retail forex dealer takes to earn their wide spread. Like going short gamma, usually you just collect your premium, but every once in a while, something happens and you lose your lunch.

    A 2% fee for currency conversion though does seem high if you are paying such a large spread - are you converting into an illiquid currency like zlotys, etc..? Hopefully your spreads are tighter than above examples. Sounds like profiteering by the bank, but sometimes such situations are legislated.
  7. But if one can buy and sell amounts <25000 through a broker ( don't know if it's ok to name them here so I wont) for like a .001 spread, why can't banks do the same? Why don't they process the transfer as if it were in the home country currency and then when needed to actually send it, quickly convert it to USD ( the 2% fee is actually for euro to USD, but it's 0.5% transfer fee and over 1% currency spread (which they do not say they charge) ), on the market. It seems to me like they are imposing this fee hidden from the consumer, since if most people knew that instead of 0.5% they are paying closer to 2% they would probably not transfer at all. I would just like to know if banks could, in practice and if they wanted to, buy and sell individual 10-20-100k amounts for each transfer with a .001 spread like we can through a broker, of if there is some legal constraint for banks specifically which forces them to use the fixed rate?
  8. i believe the answer to the most recent post is that in theory a bank could deal with smaller deal sizes...the question is do they believe it's worth their time?

    banks have geared themselves to deal on an institutional/commercial level. it's a completely different ballgame to provide market making for smaller deal sizes. it would require people and infrastructure trained to support a typical retail client base. additionally it would require aggregating thousands of small orders just to make a standard deal size on the Interbank level. this is more time intensive than what bank trading desks want to get involved with.

    it's a question of risk/reward relative to how they're currently structured. for the time being they generally don't believe it's worth their time to create a service for the masses. though i also believe this is slowly changing.