0

TL;DR: What is the proper way of calculating the exact loss (due to the exchange rate(*)) on a currency exchange transaction?

(*) I'm not interested in other costs, like commission fee.

Longer example: AKA what I assume is the 'proper' way:

Let's say I'm a tourist in the EU and I want to buy 100 EUR for USD. I check the official exchange rate, which today (26.12.2018, according to Google) is 1 EUR = 1.139 USD. Let's assume this is the 'official' exchange rate, and work with this.

Now, if I find a place that sells me 1 EUR for 1.2 USD and I buy 100 EUR, then I will spend 1.2 * 100 = 120 USD. But, if I could have bought the 100 EUR for the official rate, I would have spent only 1.139 * 100 = 113.9 USD.

So, on the transaction, I have lost 120 - 113.9 = 6.1 USD which is 6.1 / 1.139 = 5.36 EUR.

Question: is the above calculation correct? If not, then what are the issues, and what would be the correct way to calculate the loss?

Improve this question

1 Answer 1

Reset to default
2

Your calculation is correct as far as math goes, but that's not a loss. If its anything you could consider it a fee, but even then since you're not paying it it's not really that either. The published price will be for a lot size of like $100,000. If you're not working with that kind of number, you're not getting the published price; it's not a loss, it's just a different price.

Improve this answer
4
  • Could you expand on why it is not a loss? Maybe I was not using the correct term, but my reason to call it a loss is that now I have 6.1 USD (or 5.36 EUR) less than before the transaction.
    – Attilio
    Commented Dec 26, 2018 at 17:01
  • I understand your reasoning. But, you traded 100 EUR for 120 USD, that was the trade. A loss generally means I bought something for 5 and sold it for 4, resulting in a loss of 1. If you were to trade your 120 USD back to EUR and only had 90 EUR that would be a loss of 10 EUR. Comparing the spot rate to a real transactable exchange rate is only useful in determining whether or not you got a good deal.
    – quid
    Commented Dec 26, 2018 at 17:09
  • @Attilio Like quid I would also say that the ''loss'' on the exchange rate is more of a fee than a real loss. The first trade of 100 EUR for 120 USD would simply be a transaction where you agree to buy something for a certain price, therefore no loss on your part (even if yes in the end you would have lost some money by doing this transaction instead of an other one).
    – Gainz
    Commented Dec 27, 2018 at 15:38
  • Thanks quid and Gainz, that makes sense. So, if I understand correctly: if I buy 100 EUR for 120 USD, then that was just the "price" for the 100 EUR. But, if I resell those 100 EUR for say, 105 USD then I have a loss of 15 USD.
    – Attilio
    Commented Dec 28, 2018 at 10:53

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .