An exchange rate determines the value of one currency in relation to another currency

Exchange rates are usually quoted as the value of one unit of one currency in terms of another currency. For example:

1 Pound Sterling = 1.4194 US Dollars (example rate)

Most exchange rates have a bid price and an offer price, for example:

Bid price: 1 Pound Sterling = 1.4189 US Dollars
Offer price: 1 Pound Sterling = 1.4199 US Dollars

A customer of a bank can sell Pounds Sterling against US Dollars at the bid price and buy Pounds Sterling against US Dollars at the offer price.

In the wholesale foreign exchange market, the difference between the bid and the offer (known as the "spread") is typically only around 0.1% for major currencies. In the retail market (bureaux de change, high street banks etc), typical profit margins of between 1% and 3% are added to the wholesale rate in order to create a retail rate.

Bureaux de Change

Bureaux de change in some countries (e.g. the United Kingdom and the United States) typically charge commission for changing banknotes, whereas in other countries (e.g. France and Singapore), they typically do not. However, whether or not a bureau de change charges commission is not significant, as it is the overall net rate that is important. Beware of banks and bureaux de change that advertise "no commission" in countries where commission is common, as their exchange rates may be very poor and incorporate a hidden commission.

When comparing rates between bureaux de change, calculate the net rate after all commission charges. For example, if you are in the UK and you want to buy 500 US Dollars, simply ask a bureau de change how much (in Pounds Sterling) they will charge you for 500 US Dollars. Then divide 500 by the number of Pounds Sterling, which will give you the true exchange rate, net of any commission. This rate can then be more transparently compared against other bureaux de change.