If I have 100 USD and I go to a bank somewhere in Europe and ask for an exchange in euros, how do they just accept it?
Like here’s my paper money that’s technically worthless to you, now give me your paper money that’s valuable to you.
In: Economics
There’s certain currencies that are accepted as foreign currency, some are not. In EU and much of the world they will exchange it. It’s not worthless it’s worth whatever the exchange rate is as well as the fee they will charge you on the difference/timing of the exchange.
Banks are a middle man. You want to sell USD and there is someone that wants USD. They give you a little less than the official exchange rate and charge someone else a little more.
They make money off the spread between the two.
Wherever you’re exchanging your money, they will charge you a higher rate than they know they can sell your dollars at.
You might walk into a currency exchange place and they will give you 0.8 euros for every dollar. The actual exchange rate is around 0.9 euros, so they know they can make a profit on the transaction by selling those dollars to someone else at a better rate.
In your example, you would give them 100 USD and receive 80 EUR. If someone from Europe then came in and wanted to buy dollars, the exchange might offer them 1:1. They pay 100 EUR and receive 100 USD. The exchange has therefore profited 20 EUR from the transaction.
Your paper money ISNT worthless to the bank. They turn around and wait for a European to come in and say “I am going to America I need some dollars please.” And then they give that European your dollars.
And, the bank collects a small fee from the both of you, making money off the transaction.
>Like here’s my paper money that’s technically worthless to you, now give me your paper money that’s valuable to you.
If it was worthless to them they wouldn’t accept it.
They accept it entirely because it has some degree of value, and they can take advantage of the demand for that currency that *someone* has, and charge a fee for exchanging currencies.
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