What is Exchange House? Definition of Exchange House, Exchange House Meaning and Concept
An exchange house is an entity that is dedicated to the purchase and sale of foreign currency. This, with the aim of making a profit.
The profits of these institutions come mainly from the difference between the exchange rates of purchase and sale of the currencies they handle.
To explain the above, let's see, for example, the case of an exchange house in Mexico. It can charge an average exchange rate of $ 18.4 (Mexican pesos) per dollar during August 31 for the purchase and of $ 19.10 for the sale.
That is, in the case shown, for every US $ 10 that the company bought and then sold during the last day of August, it obtained a profit of $ 7. Since for every US $ it obtains $ 18.4 and then sells it to $ 19.10. The difference is $ 0.7. With which if you buy US $ 10 you will get $ 7.
However, it should be clarified that to calculate the net profit other expenses such as the rent of the premises where the business operates must be considered.
Main characteristics of an exchange house
The main characteristics of an exchange house are:
- They are usually located in places frequented by tourists such as travel agencies, airports, train stations, among others.
- They may or may not be linked to large financial groups.
- People who are dedicated to buying and selling currency are called moneychangers, and they can work in an exchange office or on public roads.
- Exchange houses usually charge an exchange rate according to the market, adding a commission for the service provided. This may or may not be explicitly displayed to the customer.
- As in international markets, in exchange houses the prices of currencies vary throughout the same day.
- The exchange houses keep stocks of the local currency and more than one currency, especially if it is widely used throughout the world, such as the dollar and the euro.
- For their operation, these institutions usually require the authorization of a state regulator who is then in charge of their supervision.
- These entities not only trade with notes and coins, but sometimes buy and sell papers. For example, they can receive a security in foreign currency, delivering cash in exchange. Likewise, they can issue documents payable on demand denominated in an international currency.
Segments that serve the exchange houses
The segments served by exchange houses are:
- Interbank: They are operations of large amounts that are carried out between exchange houses and banks.
- Corporate: These are transactions that seek to cover the requirements of buying or selling foreign currency of companies. It may be the case, for example, of an exporter who receives her income in dollars and needs to change it into her local currency. These funds are normally then used to finance the productive activity of the firm in question.
- Retailer: When the customers are natural persons, for example, tourists who want to buy local currency. The amounts of the operations are lower than in the previous cases. The sending of money remittances also enters here, for example, from individuals who have emigrated abroad and who financially support their families.