How does a bank exchange currency?


Quick Answer

Banks exchange currency by selling customers one type of currency in exchange for another, based on the exchange rate for those currencies. For instance, with a currency exchange rate from the American dollar to the British pound of 0.67, a bank sells 67 British pounds for $100.

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How does a bank exchange currency?
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Full Answer

The exchange rate between two currencies varies depending on market forces. Many online services provide listings of currency exchange rates, including XE.com and GoCurrency.com. To calculate, on GoCurrency.com, how much one type of currency buys of another, enter the amount of money you wish to convert to another currency. Select the starting currency and the currency it is being converted to, and click Convert.

Most banks, currency exchanges and hotels offer a slightly worse exchange rate than the one listed on XE.com and GoCurrency.com. These companies sell customers less currency than the customer's money is worth in order to make a small profit on each transaction.

As with stocks and commodities, investors also buy and sell currency. Investors attempt predict the market and buy currencies when the cost is low and sell them when the cost is high. Investors also use more complicated tricks, such as arbitrage, to profit in the currency market.

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