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One thing I've always wondered: how aligned is the current spot price to day to day transactions when the trading day is active? Let's say EUR/USD reaches pari

One thing I've always wondered: how aligned is the current spot price to day to day transactions when the trading day is active? Let's say EUR/USD reaches parity for 2 hours during the trading day and I'm in Europe -- for those two hours are my transactions 1 to 1 or is there a lag of a few hours? Or is the "on the ground" exchange rate representative of the previous closing price?

rr888 4y ago
There is no central exchange for FX so no "official spot price". I'm not clear what time is used to set the FX rate when you swipe a credit card. If you use a credit card it'll depend on the bank, and different banks will have different timing. https://www.nerdwallet.com/article/credit-cards/currency-exchange-rate-credit-card-statement-doesnt-match-online-rate https://www.nerdwallet.com/article/credit-cards/currency-exc... . That site looks like the ISK example isn't right, but does have other hints and says ask your issuer.
- mikymoothrowa 4y ago
  How are the currencies traded? US Bank A maintains an account with British Bank B but it’s dollar account Now an American business with account in Bank A is paying a British contractor $100 in Bank B So Bank B is going to subtract $100 from Bank A’s Dollar denominated account and add GBP 84 to the British contractors account. What happens in between? How did those dollars become pounds?
  - rr888 4y ago
    A foreign exchange is an exchange, ie there are two sides. Each starts with one thing and ends up with another. In your example American Bank A starts with $100 and ends up with £84, British Bank (or an intermediary) has to have someone who wants dollars (or is a Market Maker), that person will give their pounds and end up with the dollars. Having two parties and two banks makes it a bit complicated. If you think of a guy behind a desk in an airport trading cash - you give him $100 and get £84, the guy behind the desk started with £84 and now has $100. (The next customer might pay £87 to get $100 - the desk makes a small profit and both customers have exchanged what they wanted)
    - mikymoothrowa 4y ago
      Where is this exchange? Clearly if the price changes can be reported with such high precision, it needs to be based on a solid value from an exchange or a set of real exchanges instead of an aggregate of all the airport guys exchanging cash. (For that matter, even the airport guys don’t set their own prices. They set a commission on top of the day’s forex rate)
      - rr888 4y ago
        There is no exchange, no central price. If you see a price on TV or somewhere its what a given bank or instution quotes, or maybe a blend of quotes. This is probably true of everything now, if you buy Apple stock you probably aren't trading on Nasdaq you trade on some hedge fund algo, the Nasdaq price is an approximation of what bid/ask you'll trade at.
  - dkjaudyeqooe 4y ago
    Like everything else, they either already had pounds to sell, or they went to the market (ie, another seller) to buy pounds so they could resell them. The currencies themselves are merely entries in a (bank) ledger for an account denominated in the given currency. The same with shares, options and other intangibles; they are records in institutions that are empowered to hold them.
    - mikymoothrowa 4y ago
      Two questions: 1. What/Where is this market? What’s the forex equivalent of NYSE or NASDAQ 2. Even If both the banks hold the other country’s currency, (which in most cases they won’t), how do they know what the exchange rate is.
      - dkjaudyeqooe 4y ago
        FX is a shared or "distributed" market between the institutions that trade, such as big international banks and other market participants. They would use a shared electronic market (reporting) to determine the price. It's not exchange (as in NYSE) based. The exchange rate is set by what the market participants are willing to trade at. Banks can hold numerous currencies by having banking licences in the respective countries. See here for more details: https://en.wikipedia.org/wiki/Foreign_exchange_market https://en.wikipedia.org/wiki/Foreign_exchange_market
gameshot911 4y ago
I researched this for my Chase Saphhire Reserve card, which uses Visa as its bank. They lock in exchange rates for the whole day, based on rates yesterday. Don't know precisely what hour it's locked in, or if it's an average for the whole day, or some other calculation. I think I calculated that they are charging ~1-2% premium on top of the market rate. CSR has no fees beyond that for foreign currency purchases.
- pinko 4y ago
  Just out of curiosity, I wonder what if any liquid EUR-denominated good or services a US borrower could profitably buy with a credit card (if they had a huge, say, $1M credit limit), in the event the Euro ever dropped >5% in one day against the dollar, to exploit this delay. I can't think of anything offhand but I bet someone clever could, and make some money doing it.
dkjaudyeqooe 4y ago
Although there tends to be a global reported price for FX, in reality it's an array of institutions enabling buying and selling. The actual price you get for your transactions depends on who you're transacting with. If you use a Visa or a Mastercard, generally there is fee taken by those companies, about 0.5% and then your bank may take a further cut, usually about 3%. There are many cards that don't take the 3%. You may find that the transaction is reported to you initially near the spot price, less the 0.5%, but you'll see a different amount on your statement because the settlement of the transaction takes place at a different time (maybe 2 days later) and a different exchange rate. The reason for this is that the parties involved want to avoid exchange rate risk so they take the market rate when they actually account for the payment.

rr888 4y ago

There is no central exchange for FX so no "official spot price". I'm not clear what time is used to set the FX rate when you swipe a credit card. If you use a credit card it'll depend on the bank, and different banks will have different timing. https://www.nerdwallet.com/article/credit-cards/currency-exchange-rate-credit-card-statement-doesnt-match-online-rate https://www.nerdwallet.com/article/credit-cards/currency-exc... . That site looks like the ISK example isn't right, but does have other hints and says ask your issuer.

mikymoothrowa 4y ago
How are the currencies traded? US Bank A maintains an account with British Bank B but it’s dollar account Now an American business with account in Bank A is paying a British contractor $100 in Bank B So Bank B is going to subtract $100 from Bank A’s Dollar denominated account and add GBP 84 to the British contractors account. What happens in between? How did those dollars become pounds?
- rr888 4y ago
  A foreign exchange is an exchange, ie there are two sides. Each starts with one thing and ends up with another. In your example American Bank A starts with $100 and ends up with £84, British Bank (or an intermediary) has to have someone who wants dollars (or is a Market Maker), that person will give their pounds and end up with the dollars. Having two parties and two banks makes it a bit complicated. If you think of a guy behind a desk in an airport trading cash - you give him $100 and get £84, the guy behind the desk started with £84 and now has $100. (The next customer might pay £87 to get $100 - the desk makes a small profit and both customers have exchanged what they wanted)
  - mikymoothrowa 4y ago
    Where is this exchange? Clearly if the price changes can be reported with such high precision, it needs to be based on a solid value from an exchange or a set of real exchanges instead of an aggregate of all the airport guys exchanging cash. (For that matter, even the airport guys don’t set their own prices. They set a commission on top of the day’s forex rate)
    - rr888 4y ago
      There is no exchange, no central price. If you see a price on TV or somewhere its what a given bank or instution quotes, or maybe a blend of quotes. This is probably true of everything now, if you buy Apple stock you probably aren't trading on Nasdaq you trade on some hedge fund algo, the Nasdaq price is an approximation of what bid/ask you'll trade at.
- dkjaudyeqooe 4y ago
  Like everything else, they either already had pounds to sell, or they went to the market (ie, another seller) to buy pounds so they could resell them. The currencies themselves are merely entries in a (bank) ledger for an account denominated in the given currency. The same with shares, options and other intangibles; they are records in institutions that are empowered to hold them.
  - mikymoothrowa 4y ago
    Two questions: 1. What/Where is this market? What’s the forex equivalent of NYSE or NASDAQ 2. Even If both the banks hold the other country’s currency, (which in most cases they won’t), how do they know what the exchange rate is.
    - dkjaudyeqooe 4y ago
      FX is a shared or "distributed" market between the institutions that trade, such as big international banks and other market participants. They would use a shared electronic market (reporting) to determine the price. It's not exchange (as in NYSE) based. The exchange rate is set by what the market participants are willing to trade at. Banks can hold numerous currencies by having banking licences in the respective countries. See here for more details: https://en.wikipedia.org/wiki/Foreign_exchange_market https://en.wikipedia.org/wiki/Foreign_exchange_market

gameshot911 4y ago

I researched this for my Chase Saphhire Reserve card, which uses Visa as its bank. They lock in exchange rates for the whole day, based on rates yesterday. Don't know precisely what hour it's locked in, or if it's an average for the whole day, or some other calculation. I think I calculated that they are charging ~1-2% premium on top of the market rate. CSR has no fees beyond that for foreign currency purchases.

pinko 4y ago
Just out of curiosity, I wonder what if any liquid EUR-denominated good or services a US borrower could profitably buy with a credit card (if they had a huge, say, $1M credit limit), in the event the Euro ever dropped >5% in one day against the dollar, to exploit this delay. I can't think of anything offhand but I bet someone clever could, and make some money doing it.

dkjaudyeqooe 4y ago

Although there tends to be a global reported price for FX, in reality it's an array of institutions enabling buying and selling. The actual price you get for your transactions depends on who you're transacting with. If you use a Visa or a Mastercard, generally there is fee taken by those companies, about 0.5% and then your bank may take a further cut, usually about 3%. There are many cards that don't take the 3%. You may find that the transaction is reported to you initially near the spot price, less the 0.5%, but you'll see a different amount on your statement because the settlement of the transaction takes place at a different time (maybe 2 days later) and a different exchange rate. The reason for this is that the parties involved want to avoid exchange rate risk so they take the market rate when they actually account for the payment.