Currency Exchange 101: Basics You Should Know

Our currency exchange guide provides practical tips on how to save
money on currency exchange, as well as sending and receiving money abroad.

If you have ever travelled abroad for a vacation, you will know that one of the first hurdles that crosses your mind is that of the currency difference. Even if you are travelling 200 miles south of the border to the neighbouring United States, you would not be able to use the Canadian dollar. You would have to convert your Canadian dollars into US dollars to be able to purchase items there. Businesses that facilitate this conversion are called currency exchange. More formally, they are organizations that are legally allowed to help customers exchange one currency for another.

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Where to exchange currency?

Currency exchange businesses are found in a variety of forms. They could be a single store located on the corner of an intersection, a larger chain of stores, or an international bank, broker or financial institution with specialist currency exchange booths. More recently, with the advent of the Internet, more and more exchanges are now available online. After linking your bank account, you can receive funds directly as per the prevailing rate on the quoted day. These exchanges make their money through two primary means:

Charging a nominal fee for their services (could be a flat fee or a fee levied as a percentage of the total value of the transaction) and/or

Adjusting the exchange rate for the funds that they provide you with. 

How do foreign currency exchanges work?

Regardless of whether you choose to exchange your currency at a brick-and-mortar outlet or online, the primary function of an exchange is to enable you to convert one currency to another either by buying from or selling to you. Expanding on the example above, if you are a Canadian looking to travel to the United States, you would use the currency exchange to change your Canadian dollars into US dollars. The amount of US dollars you would get in return for each Canadian dollar is contingent on the prevailing rate on that particular day (known as the spot rate). 

This spot rate is a value that fluctuates on a day-to-day basis as defined by a group of banks that trade international currencies.

In this example, if the Canadian currency exchange rate is 0.75 USD for every 1.00 CAD, then this spot rate would get USD 75 for every CAD 100 that you exchange. However, transactions are not done at the spot rate. To ensure that they keep an element of profit for themselves, currency exchanges toggle this spot rate and keep the difference (known as the spread). 

In this case, a currency could potentially provide customers with an offer of 0.72 USD per 1.00 CAD. That means that instead of receiving 75 USD, the customer would receive 72 USD for every 100 CAD he/she provides. The currency exchange then keeps the USD 3 spread for themselves. Because these spreads may vary by day and by exchange, it could help you save significant costs if you shop around prior to selecting the best currency exchange for your needs.

Different ways to exchange money

Prior to departing a country, there are several ways that you can exchange your currency quickly and easily:

International ATMs

With certain types of cards, the international ATM withdrawal is a viable option for obtaining local currency. Using a debit card as usual, some banks have developed alliances with international partners that enables their clients to withdraw money internationally without fees. It is pertinent to note though that in the absence of fee-free options, the bank may charge anywhere from 3% to 8% fees.


One of the most common and convenient ways of exchanging cash is by going to local bank branches. Most large banks offer foreign currency exchange as a feature to their customers that can be availed either online or in person. Exchange rates at banks also tend to be better than other places because banks receive wholesale rates not available to public. In addition to that, at some banks, if you hold a high balance and/or a premium account, they will often waive delivery fees and/or provide you with better exchange rates.

Traveler’s checks

Similar to a conventional check, the traveler check has unique serial numbers and is an alternative to using notes and coins. Typically used by people when visiting foreign countries, the main benefits that it offers is security against lost or stolen checks and the convenience of not having to carry cash around. However, after arriving at a destination, the customer still has to find a place that will convert the checks into local currency and pay the affiliated fees accordingly.


All international airports host one or more international currency exchange desks where customers can hand over one currency to the clerk and receive another. However, these desks are often expensive and should generally only be used for emergencies.

Although currency exchanges have been around for a long time now, there have been fundamental paradigm shifts in the way we bank and the way we exchange money. Some new currency exchange methods that have creeped up in the recent past include:

Credit cards

The plastic credit card is a powerful tool that can be used on international travel trips. While some issuers may charge currency conversion fees of 2% to 3%, some special cards offer international travel privileges that include currency conversions at the spot rate.

Prepaid Foreign Currency Cards

Operating similar to a credit card, travellers can pre-load these foreign currency cards with a specific amount of the currency they will be using in the foreign country. Thereafter, it’s a simple swipe to make any purchases that they need to over the course of their trip. While this is a highly convenient method, it does come with high fees.

Online Providers

Online foreign exchange providers will ship foreign currency directly to your house based on spot rate adjustments plus a nominal delivery fee. These providers are convenient and offer a way to get cash on hand for immediate purchases made after entering a new country. However, the high delivery fees may be unfeasible for smaller amounts.

How to save money on current exchanges?

Given the plethora of options, it can sometimes be overwhelming to choose the best one given your specific set of needs and circumstances. The following are some easy practices that can be implemented to ensure that you are saving money on your next forex currency exchange.

Download an app that shows spot currencies in real time: Because currency rates can change on a daily basis, today’s bargain deal may be tomorrow’s unfavourable deal. To assure yourself of a good rate, download some of the many apps available online (such as the XE Currency Exchange) on your phone and benchmark your options to the spot rate shown.

The price is not always right: The rate should not be the only consideration though. Many providers will offer rates that are close to the spot rate, but then charge other ancillary fees such as delivery charges or services charges. Prior to initiating an international currency exchange, make sure you are optimizing the amount you are exchanging for total fees as well.

Change your credit card: Not all credit cards are created equal. Some cards offer the added benefit of not charging any foreign exchange fees when making an international transaction. Another benefit is that the rate is calculated based on a 30-day rolling average of the spot rate meaning that in countries with volatile currencies, you can save further by investing in the right credit card.

Do not convert hotel bills: Hotels based internationally will often ask if you want to convert the total bill into your own currency (CAD). Even if this is an option, do not take it. Hotels generally charge you higher rates than you would receive if you opted to let the credit card company handle the conversion.

Find someone with opposite needs: The best way to save on any costs at all is to find someone doing the reverse transaction of what you are doing. If you are visiting the States, find someone coming to Canada from the States and exchange at the prevailing spot rate directly. This enables both parties to save costs. 

How to send and receive money abroad?

When sending and receiving money abroad, there are multiple different options that can be used. The final selection should be made based on speed, efficiency and total cost of the transaction. 

Banks or credit unions:

For retail banking transactions, banks and credit unions offer wire services that charge a flat fee (normally between $10 and $50). The wire transfer is an electronic transfer of money that goes from one institution to another over a network such as the SWIFT or Fedwire. These transactions are immediate and reliable, and international recipients can access the funds within 2 to 5 business days from the day the transfer is completed.

Money transfer businesses:

There are several businesses specializing purely in money transfers from one country to another. These businesses may be in brick-and-mortar outlets (often as part of post offices or convenience stores) or may be an online presence. Fees and delivery times vary significantly though, so it could be worth using a comparison tool to find the best solution for your needs. One such tool is Finder!


Platforms such as PayPal allow you to transfer money internationally by connecting your bank account or credit card. A fee is then charged on this transaction. Other online providers include TransferWise, OFX, Xoom, MoneyGram, CurrencyFair and Western Union.

What features should I be looking for when sending money abroad?

If you are selecting between the various options for sending and receiving money described above, some key features that should be evaluated are:

Exchange rates

Exchange rates

First and foremost, check the exchange rate that each provider is offering. The closer the rate is to the spot rate, the more money that your recipient will receive in their account at the opposite end.



Depending on the method used to transfer funds and the amount sent, companies will charge specific fees to execute foreign money transfers. Using a comparison tool can also be helpful here to know the total cost of a transaction across various providers.

Added features

Added features

Some money exchange businesses offer value-add features to customers that include regularly scheduled payments and/or forward contracts if the customer is scheduled to make regular payments in perhaps a volatile currency.

Customer service

Customer service

For time-sensitive transactions that need to be completed without hiccups, paying a slight premium for rapid customer service can often be preferred. If this is one of your needs, check the customer service options that the provider offers (live chat, phone, 24/7 service etc.)

How do businesses handle currency fluctuations?

Currency fluctuations can often be detrimental to a business’s P&L at the end of a quarter or fiscal year. To protect their profits from being eroded, businesses that engage often in foreign currency transactions will set up financial instruments such as forward contracts or derivatives. 

Forward contracts

A forward contract is an agreement by two parties to exchange a specific amount of one currency for another currency at a fixed exchange rate. The pre-determined nature of these contracts enables businesses to lock in a transaction value and therefore budget better despite macroeconomic fluctuations in currency.


Unlike a forward contract, the derivative offers customers the right, but not the obligation to exchange a set amount of currency at a specific rate. For businesses looking to reduce their foreign exchange risk, this can be an effective tool that doesn’t lock them into a specific contract, thus giving them flexibility to capitalize on market movements. They can also use these derivatives to “speculate” i.e. trade on the expectation that currencies will move a certain way. Ultimately, this allows them to make non-operating income separate from the normal profit they earn from their bread-and-butter operations.