Bank rates for Sterling offer opportunities
December 22, 2003
Want to make some money in only a few days? Well, the recent weakness in the US dollar to the UK pound and many other currencies has yet to be noticed by the major banks. So that means arbitrage opportunities to buy pound sterling at the banks and then sell it to cambios.
This comes at a time when the US dollar is in near free fall going from less than US$1.60 to the pound in mid-September to US$1.76 yesterday. It appears the dollar has much further to fall with some predicting $2 to 1 pound early next year.
But local banks seem to be taking little notice of this if anyone who has recently received a wire transfer from the UK will have found out to their great cost.
One customer, having just discovered a transfer had come in, asked how much the exchange rate was. This was initially quoted at $285 to the UK pound and this was when the US dollar was trading at the same bank at $188. If you divide $285 by $189 you get a rate of only $1.51 per pound. After briefly explaining this was way too low, the clerk raised the quote to $288. Unsatisfied, the customer went to a supervisor who quoted $295. Once again he complained and finally settled for a rate of $308, the equivalent of US$1.63, better than the original quote but still below the international market rate of US$1.75.
As for note transactions, the bank rates are below those of the cambios which are selling pounds at $320 to $333. The banks are selling in the $290 to $315 range. And this is where the opportunity to make money comes in. Let's say you have $1M. Take this to the bank and change it into pounds at the best rate of $290. This works out to 3,448 pounds.
Now take the pounds to the cambio with the best buying rate of $333 and change the money back into Guyana dollars. You get back $1.148M. Head back to the same bank and change those Guyana dollars into pounds at $290 (now 3,959 pounds) and go back again to the same cambio changing it into $1.318M and so on until after only five transactions your $1M would be worth $1.996M. This is the best case scenario but in any situation where the bank's selling rate is lower than the cambio's buying rate there is money to be made.
This is currently the case for all of the banks where the highest selling rate is $315 and the lowest buying rate for the cambios is $320.
The offer is subject to availability of pounds and certain bank transaction fees apply but there is an inefficiency in the system open for exploitation. Part of the reason is that few pounds are traded so the market lacks liquidity. In September, cash transactions for pounds were the equivalent of US$900,000 for banks and US$900,000 for the cambios, a total of US$1.8M. This compares to US$42M (cambios) and US$35M (banks) for the US dollar.
The greater competition for dollars is also reflected in its spread, between the buying and selling rate, which is narrower than that for the pound.
What is clear is that customers receiving wire transfers from the UK are not being given a good rate because they have no choice but to accept the rate the bank gives them. One solution is to have your wire transfers denominated in US dollars. Or if push comes to shove, indulge in some currency dealing to make up the difference.