In a quick trip to Mexico during the recent market turmoil, something caught my eye as soon as I disembarked from the plane. Currency exchange booths were everywhere, showing bid and ask exchange rates between the Mexican peso and the U.S. dollar. The actual levels were not precisely what drew my attention (despite reaching historical dollar highs). Instead it was the bid/ask spread that was outrageously wide, despite the competitive environment.
Indeed, bid/ask differential varies depending on the volatility of the markets, which at that time were worried about the subprime crisis and the liquidity drought in the United States. Banks and other currency exchange houses minimize their risk by buying cheap dollars and selling them at a higher price, and in a controlled supply market (i.e. inside the airport) demand was considered constant and somewhat price inelastic. "The banks are making a killing,"I thought, and this led to a deeper reflection: What are the main factors required to make money in the currency exchange market?...
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