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
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.
Latest Answers