Which is the true markup/penalty on currency conversion?
Then I thought, say I pay $135 for £100, then turn around and sell my £100 for $118. I've lost $17 on my $135, which is 12.6%. And that's how Wise does it, (high-low) ÷ high.
Which of these two methods gives the true markup/penalty? Argue your position passionately.
In this case, I find the markup/penalty/house edge to be 6.508% per transaction.
It should be noted that the buyer would lose 12.6% buying and then selling, but that is two transactions.
The way I look at this is to ask what is the fair exchange rate? I assume the house edge is the same both ways. Let's call x the fair rate of the value of the GBP/USD. That can be found as follows:
135/x = x/118
x^2 = 15930
x = 126.214104
126.214/135 = 118/126.214 = 93.4919%
That is the RTP, to use gambling terminology. The seller gets back 93.49% of the value of his original currency and the banking organization takes the rest (6.51%).
I hope that was passionate enough.
For those who didn't follow, it's a grind. $100 x 93.4919% RTP on the 1st transaction leaves you with 93.4919, then multiply your $93.4919 balance by 93.4919% RTP on the second transaction = $87.41, for a loss of $12.59, or 12.6%
FWIW, the 12.6% figure seems more reasonable (logical) to me than the 14.4%.
In the UK one tends to get a better deal buying than when trying to sell them back. For instance at the moment the true rate is about 1.2144 and one place offers 1.1656 and 1.3314 (although I'm sure you can probably get better rates by looking around).Quote: Wizard...I assume the house edge is the same both ways...
https://finance.yahoo.com/quote/GBPUSD=X
https://www.johnlewisfinance.com/currency/buy-back-foreign-currency.html
Quote: WizardThis is a topic I find interesting.
In this case, I find the markup/penalty/house edge to be 6.508% per transaction.
It should be noted that the buyer would lose 12.6% buying and then selling, but that is two transactions.
The way I look at this is to ask what is the fair exchange rate? I assume the house edge is the same both ways. Let's call x the fair rate of the value of the GBP/USD. That can be found as follows:
135/x = x/118
x^2 = 15930
x = 126.214104
126.214/135 = 118/126.214 = 93.4919%
That is the RTP, to use gambling terminology. The seller gets back 93.49% of the value of his original currency and the banking organization takes the rest (6.51%).
I hope that was passionate enough.
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I agree with the 6%ish. It’s only 12%ish if I convert it back. I never convert my Canadian currency back to American. If I win or don’t lose everything I bring the Canadian back with me. If I accumulate ‘too much’ I spend it instead of using a credit card.
My local Canadian casino has great exchange rates. Th spread is way less than the bank you reference.
I’m not sure I was passionate enough answering though….
Quote: SOOPOOQuote: WizardThis is a topic I find interesting.
In this case, I find the markup/penalty/house edge to be 6.508% per transaction.
It should be noted that the buyer would lose 12.6% buying and then selling, but that is two transactions.
The way I look at this is to ask what is the fair exchange rate? I assume the house edge is the same both ways. Let's call x the fair rate of the value of the GBP/USD. That can be found as follows:
135/x = x/118
x^2 = 15930
x = 126.214104
126.214/135 = 118/126.214 = 93.4919%
That is the RTP, to use gambling terminology. The seller gets back 93.49% of the value of his original currency and the banking organization takes the rest (6.51%).
I hope that was passionate enough.
link to original post
I agree with the 6%ish. It’s only 12%ish if I convert it back. I never convert my Canadian currency back to American. If I win or don’t lose everything I bring the Canadian back with me. If I accumulate ‘too much’ I spend it instead of using a credit card.
My local Canadian casino has great exchange rates. Th spread is way less than the bank you reference.
I’m not sure I was passionate enough answering though….
link to original post
In the good old days Canadian casinos would pay more than the going rate for currency conversion just to get you in the door.
Before My time Nevada casinos did the same. There were guys who did well running Canadian money.Quote: DRichQuote: SOOPOOQuote: WizardThis is a topic I find interesting.
In this case, I find the markup/penalty/house edge to be 6.508% per transaction.
It should be noted that the buyer would lose 12.6% buying and then selling, but that is two transactions.
The way I look at this is to ask what is the fair exchange rate? I assume the house edge is the same both ways. Let's call x the fair rate of the value of the GBP/USD. That can be found as follows:
135/x = x/118
x^2 = 15930
x = 126.214104
126.214/135 = 118/126.214 = 93.4919%
That is the RTP, to use gambling terminology. The seller gets back 93.49% of the value of his original currency and the banking organization takes the rest (6.51%).
I hope that was passionate enough.
link to original post
I agree with the 6%ish. It’s only 12%ish if I convert it back. I never convert my Canadian currency back to American. If I win or don’t lose everything I bring the Canadian back with me. If I accumulate ‘too much’ I spend it instead of using a credit card.
My local Canadian casino has great exchange rates. Th spread is way less than the bank you reference.
I’m not sure I was passionate enough answering though….
link to original post
In the good old days Canadian casinos would pay more than the going rate for currency conversion just to get you in the door.
link to original post
Quote: AxelWolfBefore My time Nevada casinos did the same. There were guys who did well running Canadian money.Quote: DRichQuote: SOOPOOQuote: WizardThis is a topic I find interesting.
In this case, I find the markup/penalty/house edge to be 6.508% per transaction.
It should be noted that the buyer would lose 12.6% buying and then selling, but that is two transactions.
The way I look at this is to ask what is the fair exchange rate? I assume the house edge is the same both ways. Let's call x the fair rate of the value of the GBP/USD. That can be found as follows:
135/x = x/118
x^2 = 15930
x = 126.214104
126.214/135 = 118/126.214 = 93.4919%
That is the RTP, to use gambling terminology. The seller gets back 93.49% of the value of his original currency and the banking organization takes the rest (6.51%).
I hope that was passionate enough.
link to original post
I agree with the 6%ish. It’s only 12%ish if I convert it back. I never convert my Canadian currency back to American. If I win or don’t lose everything I bring the Canadian back with me. If I accumulate ‘too much’ I spend it instead of using a credit card.
My local Canadian casino has great exchange rates. Th spread is way less than the bank you reference.
I’m not sure I was passionate enough answering though….
link to original post
In the good old days Canadian casinos would pay more than the going rate for currency conversion just to get you in the door.
link to original post
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Until a few years ago, the gas station/travel plaza in Needles exchanged Canadian money at extremely favorable terms. It was a determining factor in visiting Laughlin . It was also the home of Snoopy's long lost brother Spike.
When I was in Paris last year I had about 50,000 in Hong Kong dollars I wanted to convert to Euros, which would have been worth several thousand Euros. Shopping around definitely paid off. I found a shop where the juice was only about 2%.
Also be wary of transaction fees.
BTW, I agree with Wiz's assessment of the "house edge" for exchange rates.
Every decade or so, I ask my bank to do a currency exchange, and they say they can't do it, or they have some kind of delay that makes it not worth the effort. :(
If I recall correctly, soon after the Downtown Grand opened they had some +EV situations with exchanging Canadian money, perhaps other currencies as well.Quote: WizardI always thought it would be nice for casinos to change your money back at the same rate as the initial transaction for proven players.
When I was in Paris last year I had about 50,000 in Hong Kong dollars I wanted to convert to Euros, which would have been worth several thousand Euros. Shopping around definitely paid off. I found a shop where the juice was only about 2%.
Also be wary of transaction fees.
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PokerAlwaysOnGrinder might have some knowledge of this. I know someone was taking advantage of it.
Quote: charliepatrickIn the UK one tends to get a better deal buying than when trying to sell them back. For instance at the moment the true rate is about 1.2144 and one place offers 1.1656 and 1.3314 (although I'm sure you can probably get better rates by looking around).Quote: Wizard...I assume the house edge is the same both ways...
Usually, you are better off exchanging in the desired currency's country. This is relatively simple supply and demand; you have, say, dollars, which a USA bank has a lot of but a UK bank does not (and probably wants more, so it can handle people who want to exchange dollars for pounds before leaving), and want pounds, which the UK bank has a lot of but the USA bank does not.
Quote: ThatDonGuyUsually, you are better off exchanging in the desired currency's country. This is relatively simple supply and demand; you have, say, dollars, which a USA bank has a lot of but a UK bank does not (and probably wants more, so it can handle people who want to exchange dollars for pounds before leaving), and want pounds, which the UK bank has a lot of but the USA bank does not.
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There is a puzzle in economics along this line, as follows.
Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly. There are bars on both sides of the border, which each accept both currencies. Both have a need to trade some of the opposite countries currency to their own. In that effort, the US bar offers a free beer if you exchange 100 USD to 100 CD. The bar on the Canadian side does the opposite, free beer for exchanging 100 CD to 100 USD. ThatDonGuy walks back and forth over the border, exchanging the 100 back and forth, enjoying free beer. The question is who is actually the one paying for the beer?
Back to the OP, a formula for the expected return at a currency exchange service is sqrt(lower number/higher number). In the original question this would be sqrt(118/135) = 93.4919%.
Quote: Wizard
There is a puzzle in economics along this line, as follows.
Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly. There are bars on both sides of the border, which each accept both currencies. Both have a need to trade some of the opposite countries currency to their own. In that effort, the US bar offers a free beer if you exchange 100 USD to 100 CD. The bar on the Canadian side does the opposite, free beer for exchanging 100 CD to 100 USD. ThatDonGuy walks back and forth over the border, exchanging the 100 back and forth, enjoying free beer. The question is who is actually the one paying for the beer?
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Quote: TigerWuQuote: Wizard
There is a puzzle in economics along this line, as follows.
Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly. There are bars on both sides of the border, which each accept both currencies. Both have a need to trade some of the opposite countries currency to their own. In that effort, the US bar offers a free beer if you exchange 100 USD to 100 CD. The bar on the Canadian side does the opposite, free beer for exchanging 100 CD to 100 USD. ThatDonGuy walks back and forth over the border, exchanging the 100 back and forth, enjoying free beer. The question is who is actually the one paying for the beer?
link to original postThe bars are paying for the beers. If the currencies trade evenly, ThatDonGuy is not spending money, he's just handing a bill back and forth and collecting free beers.
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Welll:
Hence the puzzle.
The person gets a free beer (or two per back and forth trip). Now they have to decide whether it's worth the effort and time just for a free beer. The loser is the bank who no longer gets $2.
fwiw anyone can get free coffee at IKEA Monday-Friday. Is it worth the effort, yes if it's a sunny day as I can take a free bus trip into town, read the paper and do the puzzles. I might even see one of the big ships in dock. What do they get, sometimes I even buy things there.
Quote: unJon
If the transaction fee to exchange money is more than the cost of a beer, then the bars are saving money, and ThatDonGuy is paying for it with his transportation time back and forth across the border.
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It's not that Charlie is wrong, but I prefer the wording of this reply. ThatDonGuy is doing economic work by moving currency where to where it has more value. For that, he is paid the beer. So TDG is the one paying for the beer by his labor.
Quote: unJonWelll:
If the transaction fee to exchange money is more than the cost of a beer, then the bars are saving money, and ThatDonGuy is paying for it with his transportation time back and forth across the border.
Hence the puzzle.
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The way I am reading the puzzle it implies there is no transaction fee for the bars.
Quote: TigerWuThe way I am reading the puzzle it implies there is no transaction fee for the bars.
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Fee for doing what?
Quote: WizardQuote: TigerWuThe way I am reading the puzzle it implies there is no transaction fee for the bars.
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Fee for doing what?
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Exchanging currency.
Quote: WizardQuote: ThatDonGuyUsually, you are better off exchanging in the desired currency's country. This is relatively simple supply and demand; you have, say, dollars, which a USA bank has a lot of but a UK bank does not (and probably wants more, so it can handle people who want to exchange dollars for pounds before leaving), and want pounds, which the UK bank has a lot of but the USA bank does not.
link to original post
There is a puzzle in economics along this line, as follows.
Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly. There are bars on both sides of the border, which each accept both currencies. Both have a need to trade some of the opposite countries currency to their own. In that effort, the US bar offers a free beer if you exchange 100 USD to 100 CD. The bar on the Canadian side does the opposite, free beer for exchanging 100 CD to 100 USD. ThatDonGuy walks back and forth over the border, exchanging the 100 back and forth, enjoying free beer. The question is who is actually the one paying for the beer?
Back to the OP, a formula for the expected return at a currency exchange service is sqrt(lower number/higher number). In the original question this would be sqrt(118/135) = 93.4919%.
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The US taxpayer. In the end, we pay for everything.
Quote: TigerWuThe way I am reading the puzzle it implies there is no transaction fee for the bars.
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Why would you interpret that?
Quote: WizardQuote: TigerWuThe way I am reading the puzzle it implies there is no transaction fee for the bars.
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Why would you interpret that?
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"Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly."
Implies there are no penalties or fees involved for the purposes of this theoretical puzzle.
I would rather Withdraw using a debit card.Quote: MichaelBluejayAt the airport some time ago, one pair for $ to £ was listed as 135/118. I figured the penalty was thus 135 ÷ 118 - 1 = 14.4%. And indeed, that's how Investopedia does it, arriving at the same result with a different formula, (high-low) ÷ low.
Then I thought, say I pay $135 for £100, then turn around and sell my £100 for $118. I've lost $17 on my $135, which is 12.6%. And that's how Wise does it, (high-low) ÷ high.
Which of these two methods gives the true markup/penalty? Argue your position passionately.
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I opened a bank acct specifically for withdraws. It uses the official conversion rate (i think) and reimburses me for withdraw fees.
I also opened it for security incase the card gets compromised.
The problem is that they only give .4% interest on the acct.
When my main bank was giving me 1%, i still come out ahead.
Now my main bank gives me like 5% and they're still at .4%. :(
That's a couple hundred $ per year difference. No way i'm withdrawing enough to get reimbursed 3 figures in atm fees.
Now to find another bank that pays more competitive rates and reimburses fees
Quote: TigerWu"Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly."
Implies there are no penalties or fees involved for the purposes of this theoretical puzzle.
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It has happened before that the USD and Canadian dollar traded "roughly evenly." However, there were still fees involved if you wanted to do a conversion.
pre-9/11, my parents took me on a family trip to Niagara falls.Quote: WizardIt has happened before that the USD and Canadian dollar traded "roughly evenly." However, there were still fees involved if you wanted to do a conversion.
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The gift shop place we wondered into said that they'll take US dollars at the same price as Canadian dollars period looking back they got ripped off
:(
Quote: WizardQuote: TigerWu"Suppose the US dollar (USD) and Canadian dollar (CD) trade roughly evenly."
Implies there are no penalties or fees involved for the purposes of this theoretical puzzle.
link to original post
It has happened before that the USD and Canadian dollar traded "roughly evenly." However, there were still fees involved if you wanted to do a conversion.
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But there's no way to know that as far as this specific puzzle is concerned. There's no way to know if the fees are more or less than the cost of the beer. There's no way to know the economics involved in how the bars are getting and distributing their beer versus their financial transactions. There's no way to know if the guy getting the beer is spending more money on gas to get to the bar to cancel out the cost of the beer.
If you take the puzzle completely at face value (because otherwise there are way too many unexplained variables), the bar is the one paying by handing out free beers.
If you want to sell your Canadian money back for American money, I'm not sure this particular Canadian casino would allow that but if they did it would cost an extra 1 to 2 cents on the exchange rate. I think they said go over to the American side and get USD there.
Quote: WizardI always thought it would be nice for casinos to change your money back at the same rate as the initial transaction for proven players.
When I was in Paris last year I had about 50,000 in Hong Kong dollars I wanted to convert to Euros, which would have been worth several thousand Euros. Shopping around definitely paid off. I found a shop where the juice was only about 2%.
Also be wary of transaction fees.
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Some years ago i got close to the official rate when i changed my HKD to USD at Grand Lisboa. (Less than 0,5% fee)
