In the foreign exchange market, especially at banks or currency exchange points, we often see terms like “buy rate” and “sell rate.” Many people may not be clear about these two concepts, or even confused. Today, let’s use a simple example to help everyone understand the meaning and function of these two rates.

What are “buy exchange rate” and “sell exchange rate”?

• The buy rate is the exchange rate at which a bank or currency exchange institution is willing to purchase foreign currency; that is, when you sell foreign currency (such as US dollars) to a bank, the bank will pay you in RMB according to the buy rate

• The selling exchange rate is the rate at which a bank or currency exchange institution is willing to sell foreign currency; that is, when you buy foreign currency with Chinese Yuan, the bank will sell it to you at the selling exchange rate

Simply put:

• The buy exchange rate is the price at which a bank buys foreign currency from you
• Selling exchange rate: The price the bank offers you for foreign currency

It is important to note that banks’ buying and selling exchange rates are usually different, with the selling rate generally higher than the buying rate. This difference is the bank’s source of profit.

Case Study Analysis

To help everyone better understand the practical application of these two exchange rates, let’s take a specific example:

Suppose you go to the bank to exchange for US dollars, and the exchange rate offered by the bank is as follows:

• Buy exchange rate: 1 US dollar = 7.0 Chinese yuan
• Selling exchange rate: 1 US dollar = 7.2 Chinese yuan

Scenario 1: You sell US dollars to the bank

Suppose you have $1,000 and want to sell it to a bank; the bank will calculate based on its buying exchange rate

That means the bank will give you 7,000 RMB. The exchange rate here is a buy rate, because you are selling dollars to the bank.

Scenario 2: You buy US dollars with RMB

Suppose you have 7,000 RMB and want to exchange it for US dollars. The bank will calculate based on the selling exchange rate:

In this case, you can exchange 7000 Chinese Yuan for approximately 972.22 US dollars. The exchange rate here is a selling rate, as you are buying US dollars from the bank.

Why is the buying exchange rate different from the selling exchange rate?

You may have noticed that the bank’s buying exchange rate (7.0 RMB/USD) is lower than its selling exchange rate (7.2 RMB/USD). This is because banks typically profit from foreign exchange transactions by using this difference in rates. In other words, banks make a profit by charging a higher selling exchange rate and paying a lower buying exchange rate.

For example, in the above case, the bank’s spread is:

This difference is the bank’s source of profit

Summary

• Buy exchange rate: The bank buys foreign currency from you at this rate (the rate at which you sell foreign currency)
• Selling exchange rate: This is the exchange rate at which the bank sells foreign currency to you (the exchange rate when you buy foreign currency)
• The difference between the buying and selling exchange rates is the bank’s profit margin

Once you understand these exchange rate concepts, you can more clearly know how much foreign currency you will receive when exchanging currencies, or how much Chinese Yuan (RMB) you need to spend to buy foreign currency. I hope this simple example helps everyone better understand the basic principles of foreign exchange rates!