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Currency conversion


Currency conversion
Currency conversion, also known as foreign exchange (forex), for Canadians is the exchange of Canadian dollars to or from another currency. Many Canadians have financial transactions involving funds that involve a requirement for currency conversion and they should be aware of the fees and margins involved.
Banks charge retail customers substantial fees to exchange Canadian dollars to or from foreign currencies. Credit card companies typically charge 2.5% to convert transactions made outside of Canada into Canadian funds.Most Canadian financial institutions offer US dollar accounts and US dollar credit cards, but there is still a need to minimize costs when exchanging between currencies.
Prudent consumers have a number of techniques available that can help to minimize the costs of currency exchanges. Within brokerage accounts, there is a low cost way to convert CAD to USD, or vice versa, that has become known as Norbert's Gambit. This article also discusses how best to pay for expenses in foreign currency while travelling overseas.
Low cost CAD/USD exchange within brokerage accounts
In the common case of Canadian to US dollars (or vice versa), those with a discount brokerage account can convert funds inexpensively by technique which has become known as Norbert's Gambit. Non-registered Canadian discount brokerage accounts typically have sub-accounts in both Canadian and US dollars. Investors using this method should verify that the account has this feature before beginning. The mechanics are simpler for margin accounts, especially if short sales are allowed, but neither is strictly necessary. The method can also be used in registered accounts, even within a single Canadian dollar sub-account, if the brokerage offers automatic or on demand "wash trades" (e.g., TD Waterhouse).
Choose a reasonably liquid interlisted stock. The large Canadian banks and resource companies are usually good choices. The simultaneous purchase of such a stock in one country and sale of the same stock in the other country will effectively convert one currency to the other at close to the spot rate. The investor's cost is two trading commissions and some bid-ask spread, which is usually much less than the standard 1% (or greater) fee at a bank or broker.
Spending overseas and sending money overseas from Canada
When traveling overseas, you will make payments in foreign currency and depending on the duration of the trip, you may want to transfer some money from Canada to the other country. A partly similar situation is transferring money to relatives, friends or employees overseas, but this section focusses on transferring money to yourself. There are several methods to do this, which vary in cost and convenience. Some of the costs are obvious (e.g. fees at the ATM or at the currency exchange office; transfer fees for wire transfers) whereas others are hidden in the exchange rate. Therefore many people end up paying much more than they realize.

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