If the currency exchange shop in Bulgaria exchanged my Euros to Lev at a rate of €1 to 1.96lev, which is currently the exact market price, how do they make their profit?
In: Economics
Currency exchanges make money in a couple ways.
* Straight up charge you a fee for the service. For example, you may need to pay €20 (or whatever) on top of what you’re exchanging.
* They will also have a bid-ask spread, which is the difference between what the listed, official exchange rate is and what one is actually willing to pay. For example, even though the exchange rate is officially 1:1.96, the exchange shop may only offer 1:1.9. That means you’re not getting the full value of the exchange, effectively charging you a percentage of the transaction.
There isn’t an exact exchange rate when it comes to currency. There’s instead the bid/ask spread. Basically the price that people are offering to buy at, and the price people are offering to sell at.
If you set up your own stall and offer to exchange your Euros, you sell them at their ask price, which is higher but you have to wait for people wanting to exchange Lev for them to come to you.
If you instead go find someone already set up and ready to buy those Euros from you, then you sell them at their bid price, which is lower but more convenient for you.
This gap in the bid/ask is where their profit comes from. They buy currency for slightly less than what they sell the same currency to others.
What rate do they use to exchange Lev to Euros? There almost certainly is some spread. It may also be biased towards one of the exchange directions – for instance, if exchange shop expects rate to move a certain way in the near future.
Exact price (fixed by national bank) is 1.95583 BGN for 1 Euro, so they make ≈0.005 for each Euro sold.
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