When you plan to exchange your currency in banks, you first need to know the current commercial bank exchange rate. Banks usually offer different exchange rates, which means your bank’s exchange rate might be higher or lower than another bank.
Commercial banks offer several services that involve foreign currencies, including currency exchange and international funds transfers. However, they charge fees for the exchange rate services, which tend to vary from bank to bank.
If you’ve wondered how commercial banks set their exchange rates and why they offer different rates, worry no more. This guide explains how commercial banks set their exchange rates and the factors that can affect them.
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Foreign currency exchange or trading has become widespread among many financial institutions, including credit unions and banks.
Other companies like Knightsbridge Foreign Exchange specialize in currency exchange to offer competitive exchange rates.
Banks still account for the largest proportion despite the influx of currency exchange providers in the forex market. That’s because many people have bank accounts and are more willing to transact in their banks. As well, many people are not aware of other options.
Commercial banks are an integral part of the forex market because they offer a vast range of foreign exchange services. First, they provide platforms through which forex traders can participate. Second, they trade on their behalf and for their clients.
By trading on their behalf, commercial banks profit from currency exchange transactions. They understand the forex marketplace and can closely monitor the activities of other principal participants like central banks and investment funds.
There’s no doubt that commercial banks have been the key players in the forex market for a very long time. But with the advent of electronic broking services, forex traders are shifting their focus from banks to electronic trading systems.
With the help of electronic trading systems, forex traders can now carry out several trades simultaneously with greater speed and efficiency. Also, traders can enjoy lower trading costs, higher transparency, and better exchange rates, thus increasing profits.
A foreign exchange rate can be flexible or fixed, with flexible exchange rates changing constantly. On the other hand, fixed exchange rates don’t change.
Now, let’s dive deeper into the two types of exchange rates.
As the name suggests, a flexible exchange rate keeps changing depending on the supply and demand for a particular currency in the global forex market. For that reason, it’s also known as a floating exchange rate. It can change at any given moment.
So, how do a currency’s demand and supply affect its value and exchange rate?
Well, when the demand for a particular currency is high, its value will most likely rise. As a result, the chances are high that its exchange rate will increase. Conversely, when the currency’s demand declines, it will likely depreciate, lowering its exchange rate.
Most major currencies have flexible exchange rates, including the Canadian dollar, Japanese Yen, Mexican Peso, and US dollar. The central banks of these countries don’t fix or manipulate the exchange rates. Instead, the market forces decide.
A fixed exchange rate is quite different from a flexible exchange rate as it doesn’t rely on the changes in demand and supply of a currency on the forex market. The government regulates the currency’s value by controlling the exchange rate.
Countries with fixed exchange rates peg their currencies through their central banks. To set a fixed exchange rate, a particular central bank pegs its currency’s rate to another major currency, let’s say the US dollar or Euro.
If the government wants to maintain or regulate its fixed exchange rate, it can buy or sell its currency against the major foreign currency it’s pegged to. This means that the exchange rates in such countries can only change when the government decides.
So, which countries use fixed exchange rates? These countries include Denmark, Hong Kong, Saudi Arabia, and China.
So far, you already know that commercial banks are among the top providers of currency exchange services. But how do they set their exchange rates?
Most banks set their exchange rates within the interbank market that consists of banks buying and selling currencies to one another. As they do so, their primary objective is to make profits from the exchange rate movements.
So, what is an interbank exchange rate, and how does it influence the commercial bank exchange rate?
The interbank rate is the exchange rate used by banks to trade large amounts of foreign currencies. However, this rate is mostly reserved for big banks that trade huge sums of currencies. Small currency exchange transactions involve additional fees (markup fees) to help currency exchange providers earn profits.
The interbank rate is also known as the mid-market rate because it’s the midpoint between the buy and sell rate for a particular currency in the forex market. To find out the current interbank rate, check the exchange rate for a currency pair on Google.
Note that the interbank exchange rates for big commercial banks can change at any moment, depending on the following factors:
Generally, commercial banks set exchange rates based on the market conditions, desired return rates, market risks, credit risks, economic conditions, and other business factors. For that reason, the exchange rates tend to vary from bank to bank. A bank can add charges like markup fees to their exchange rates to profit.
As mentioned, various banks offer different exchange rates, depending on their markup fees and target profit margins. Some of the commercial banks that offer currency exchange services include:
It’s important to note that commercial bank exchange rates can fluctuate at any time. For that reason, research the current exchange rate before transacting in any bank.
Now that you know how commercial banks set their exchange rates, you might find it challenging to choose the best place to exchange your money.
Well, the truth is that commercial banks are costly when it comes to currency exchange as they usually charge high markup fees of up to 2.5 percent. For that reason, it is beneficial to find a currency exchange provider that offers the best exchange rates.
The good news is that Knightsbridge Foreign Exchange provides better exchange rates than commercial banks. By specializing in foreign currency exchange, Knightsbridge FX charges as low as 0.1 percent in markup fees, depending on the transaction amount.
Commercial banks play a vital role in the foreign exchange market as they facilitate the buying and selling of various currencies. However, the commercial bank exchange rates can be high sometimes, making currency exchange in banks very costly.
Thankfully, Knightsbridge FX offers consistent bank-beating rates to help you save more money.
Contact us today to get a quote for your currency exchange transaction.
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