Friday, July 20, 2012

Low Cost Method to do Foreign Exchange

As Canadians, we really get dinged by our banks. As a bank shareholder, I'm happy about profits, but as a consumer, I really hate paying more than I have to, for no good reason at all.

For example, take a look:
  • 1.008 - this is the current spot rate, it would cost $1008 CAD to buy $1000 USD
  • 1.0332 - this is the TD bank FX rate
  • 1.024 - this is the BMO Investorline FX rate, for up to $10k, it would cost $1024 per 1k USD
  • 1.023 - this is the BMO Investorline FX rate, for 10k to 25k
  • 1.017 - this is the 25k rate for Investorline
similar situation for the reverse
  • 0.992 - it would cost $992 USD to buy $1000 CAD
  • 1.0179 - this is the TD bank FX rate
  • 1.008 - at Investorline, it would cost me $1008 USD to buy $1000 CAD
  • 1.007 - for ~10k to 25k
  • 1.001 - for ~25k+
*Note 1: I've only listed the values up to 25k, as most people do not exchange more than that at a time, unless you're laundering drug money. 
*Note 2: There seems to be some rounding error in the Investorline calculator, so the cut off points for USD to CAD are not quite exactly 10k and 25k

Keep reading to see how much the rate differences above can really cost us!

Cost to Us, the Consumer

So how much does this really cost us?
Well... if we look at the rates being used, we can see in each direction, the rates banks give us differ (unfavorably) from the spot rate by between 1 and 2.5%. This means for every $1000 you convert, you will be paying a fee between $10 and $25. Typically, the more money you exchange, the more favorable rates are. If you only exchange a few thousand dollars, the bank fee will be 2.5%, and Investorline will be 1.5%. If you exchange more, the Investorline one can come down to 1%

Generally speaking, if you convert $5000, which is a typical amount for the average person, the fee will be ~$125 (2.5%) at the bank, and $75 (1.5%) at the brokerage.

If you plan ahead and exchange larger amounts by accumulating capital first, you may be able to do $15k at the bank for $225 (1.5%), or $150 at the brokerage (1%).

Save Yourself Some Money!

What if I told you, instead of hundreds of dollars, you could do the above for $20?

Using this lower cost method, you can exchange USD to CAD and vice versa for a flat rate of 2 trading fees. For folks at TD or BMO that have $50k combined assets or higher, that means it only costs $20!

Here's the procedure for the CAD to USD exchange from your brokerage

Step 1: Use CAD to buy a dual listed stock, choosing to buy on TSX or Canadian market, and choose to settle in CAD. Any of the major banks, telecoms, rails, pipelines are fine. I usually use BCE, because its a name I never own, so it doesn't interfere with my ACB and taxation. (see picture below, top transaction)

Step 2: Immediately sell the same dual listed stock, but make sure choose to sell on NYSE or US market, and settle in USD (see picture below, bottom transaction)

Step 3. depending on if your brokerage does it automatically or not, you may need to call in and ask them to journal the shares. BMO Investorline does it automatically, after a few days. During this time, it will show up in your holdings as a +share and -share.

Step 4: Smile as you just saved tens or hundreds of dollars :)

Just today, I used this to exchange, CAD$3175.70 to USD$3130.97, an exchange rate of 1.014. The current spot rate is 1.008. Had I done this thru normal means, I'd have been quoted 1.024 and gotten only USD$3101.27.

Hope this helps you save some money :)

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