Do you live in a place other than the United States but have to pay your agency in US dollars? If you exchange your currency to US dollars at a bank, you will be charged a markup on the exchange rate. If the amount you have to pay is large, even a small markup on the exchange rate can mean thousands of dollars of extra cost.
In this post, I want to share a strategy that I use to convert Canadian Dollars to US dollars without paying for exchange rate markup.
The method is called the Norbert’s Gambit, which involves buying and selling interlisted stocks (stocks that are listed in multiple stock exchanges in different countries). Although I will use Canadian dollars to US dollars conversion as an example, it should work with other currencies as well.
What you need
- A non-registered trading account with Canadian-dollar and US-dollar subaccounts, which usually comes with the trading account.
- A US-dollar savings or checking account.
Steps to convert Canadian dollars to US dollars
Step 1: Deposit the money in Canadian-dollar non-registered trading account. Do not use TFSA, RRSP, or other registered accounts.
Step 2: Choose a stock that is interlisted. This means the stock is traded in both Canadian and US stock exchanges. The stock should:
- be a large-cap stock with lots of liquidity
- has a low spread (small difference between its bid price and ask price)
- is in a relative calm, flat market (not wildly going up or down)
For Canadian dollars to US dollars conversion, DLR (Horizons US Dollar Currency ETF) is popular.
Step 3: Buy the stock that is traded in Canadian side. For DLR, it is DLR traded in TSX (DLR.to).
Step 4: “Journal” the stock denominated in Canadian dollars (DLR.to) to the same number of stocks listed in US exchange (DLR.u). It means to convert the stocks exchanged in TSX to the stocks exchanged in US exchange.
- Sometimes, you can journal a stock in your online trading platform. Try to look for an option worded like “Transfer Securities and Funds Between Accounts”. If you need help, ask your bank or trading company before you initiate Norbert’s Gambit. Note that, depending on which platform you use, this action might take 1 – 3 days.
- You can also call the trading desk. This may or may not be quicker than doing it yourself on your trading platform, and it may involve a fee.
Step 5: Once you see the stock in US dollars in the US-dollar sub-account, sell all of them. You’ll get US dollars in your sub-account.
Step 6: Transfer the US dollars in the trading sub-account to your US-dollar savings account. Now you have USD!
Two illustrative results
I have done Norbert’s Gambit twice. Here is the result:
1) Converting $4993.91 CAD to USD
From: $4993.91 Canadian dollars
To: $3775.89 US dollars (after subtracting $19.98 Canadian dollars in trading fees)
Effective exchange rate: 1.32258 CAD / USD
Posted exchange rate at the bank: 1.354 CAD / USD
Amount saved: $87.63 USD (2.32%)
2) Converting $44760.64 CAD to USD
From: $44760.64 Canadian dollars
To: $33194.69 US dollars (after subtracting $19.98 Canadian dollars in trading fees)
Effective exchange rate: 1.3484 CAD / USD
Posted exchange rate at the bank: 1.387 CAD / USD
Amount saved: $925.47 USD (2.07%)