What’s the difference between the spot rate and the retail rate?
Put simply, the spot market is a public financial market where huge amounts of international currency are traded 'on the spot'. A foreign exchange spot transaction is a deal where it's agreed to buy one currency and sell another currency at a particular price on a particular date. The day decided upon is called the spot date and the exchange rate agreed on is known as the spot exchange rate. Easy!
The retail rate that you’ll see in a store when you exchange your travel money is a little bit different. In the retail currency exchange market, you’ll find a buying rate and a selling rate. FX providers such as us will buy a foreign currency at the buying rate and sell it on at the selling rate. The difference between the two prices is known as the bid-ask spread: the bid price is the price that the dealer wants to ‘bid’ for a currency, and the ‘ask’ price is the price that the dealer wants to sell that currency on for. Got it?
Why can’t I buy at the spot rate?
As a tourist, you won’t be able to buy your currency at the spot rate. Why not? Think of it as similar to the difference between wholesale prices and the retail price that you get in stores. Foreign exchange dealers are buying and selling trillions of dollars (or whichever currency), compared to the likely small amounts that you’re exchanging for your next holiday. In other words, the bigger the spend, the better the deal.
It also costs retailers like us money to provide you with your euros, dollars and dirhams. With considerations such as transportation and administration costs, as well as the amount it costs us to keep our stores and our websites ticking along, there are quite of few things that we need to cover.
