Currency Conversion

Easy Norbert Gambit in TD Waterhouse RRSP Accounts

February 3, 2011

21 comments

Canadian Money Forum members are reporting (here by @avrex and here by @slacker) that converting Canadian dollars into US dollars or vice-versa with the Norbert Gambit in registered accounts at TD Waterhouse does not require journaling. If you recall, the currency conversion method involves buying an inter-listed stock on the TSX and selling the same stock in an US exchange. By riding on the coattails of arbitrageurs, investors can exchange currency pretty close to the spot rate. In taxable accounts that are not set up for shorting stocks, the Gambit requires a phone call to TD Waterhouse to journal the purchased shares from the Canadian dollar account to the US dollar account. Journaling stock involves manual intervention and any number of things could go wrong: high call volumes at TD Waterhouse, customer service reps unfamiliar with the Gambit etc.

In a RRSP account, all a TD Waterhouse client who wants to convert her Canadian dollars into US dollars needs to do is purchase a stock on the TSX and sell the same stock on the NYSE immediately. Let’s take an example. Our TD Waterhouse client purchases 25 shares of Potash Corporation (TSX: POT) for $4,526 plus commissions. She then turns around and sells Potash Corporation (NYSE: POT) for US$4,573 less commissions in the same RRSP account. She then phones TD Waterhouse the next day to wash the proceeds of the stock sale on the NYSE into the TD U.S. Money Market Fund (TDB166). Voila! She has converted Canadian dollars into US dollars for the cost of two trading commissions and bid-ask spreads. The effective exchange rate before commissions works out to US$1.0103. TD Waterhouse’s exchange rate is US$0.9962. If the client is eligible for $9.99 trading, she will be saving roughly $40 or slightly less than 1 percent on this transaction.

That doesn’t sound like much but the key difference is that the cost of a Norbert Gambit is more or less fixed but the TD Waterhouse charges a percentage for the conversion. On a $10,000 currency conversion, an investor could save around $120 (assuming $10 trading commissions). I’d be interested in hearing if the Norbert Gambit can be implemented just as easily in RRSP accounts at other discount brokers.

Saving on Currency Conversion: An Example

May 18, 2010

35 comments

A little while back, I wrote about a neat little hack I learned on Canadian Money Forum on saving money on converting Canadian dollars to US dollars or vice-versa. The hack allows you to convert Canadian dollars into US dollars by buying a highly liquid inter-listed security on the TSX, journaling it over to the US account and selling it on an US exchange. Or you could convert US dollars into Canadian dollars by buying an inter-listed stock on an US exchange, journaling it over to the Canadian account and selling it on the TSX. I recently had a chance to implement the hack in real life. Here’s my report:

I purchased 150 shares of Research in Motion (RIM) on the TSX at $67.10 (plus commission of $9.99) for a total of $10,074.99. I called TD Waterhouse and requested to journal the shares over the US account and immediately sold 150 shares of Research in Motion (RIMM) on NASDAQ at US$64.92 (minus commission of $9.99) for a total of US$9,727.86.

At that exact same time, my broker quoted an exchange rate of US$0.9560 for the currency conversion. At that rate, exchanging $10,065 would have netted US$9,622.14. The total savings net of two trading commissions of $9.99, bid-ask spreads and market risk (RIM moved slightly lower when I was on the phone): US$105.72.

A word of caution: don’t forget to double check that the trades were recorded correctly. I found that the first trade was cancelled and RIM purchased on NASDAQ — not exactly what I had instructed. It took another phone call later to correct the trades. Also, I could have reduced market risk by calling the broker first before purchasing RIM instead of first making an online trade and scrambling through the broker’s automated phone line. Still, despite the minor glitches, the conversion process went through rather smoothly and depending on how often or how much currency conversions you make, the savings could be substantial.

Save on Canadian Dollar to US Dollar Conversions (and vice versa)

March 17, 2010

60 comments

Typically, the biggest cost involved in buying stocks or ETFs listed in the US markets is the foreign exchange fees. Discount brokers typically charge 1.5% or more for converting Canadian dollars into US dollars or vice-versa. If you want to convert $10,000 Canadian into US Dollars, it will cost you at least $150 at your discount brokerage. It is not charged as a separate fee but is hidden in the exchange rate at which the conversion is done.

A Canadian Money Forum member shared a neat trick for converting loonies into greenbacks and vice-versa for little more than the cost of two stock trading commissions, the buy-ask spread and a tiny amount of market risk. The idea behind the trick is to buy a highly-liquid stock that is listed in the Toronto Stock Exchange and sell the same stock in the US markets (or vice-versa if you want to convert US dollars into Canadian dollars). I’ll illustrate how to execute this trick at TD Waterhouse (read my review here) with TD Bank’s stock as an example but it should also be possible at other discount brokers and other inter-listed stocks such as Research in Motion (TSX: RIM, NASDAQ: RIMM), BCE or Potash Corporation (POT). Note that you may not want to try this strategy with a stock you already own unless you want to trigger capital gains or losses.

TD Bank trades on both the TSX and NYSE under the ticker symbol TD. To convert $10,000, first buy TD on the TSX at the current ask in your Canadian dollar account. If TD is trading at an ask of $74.58, you’ll buy 134 shares for a total cost of C$10,003.72 (assuming a $10 commission). Then you’ll call your broker and ask to “journal” TD Bank stock over to the US dollar account and sell it there at the current bid price. If TD is trading at a bid of $73.75 on the NYSE, selling 134 shares will gross $9,882.50 (USD). Since the transaction was done through a broker, TD Waterhouse will charge $39 plus 8 cents per share for a total commission of $49.72 (US), leaving you with a net of $9,832.78 (US).

You can also use the same method to convert US dollars into Canadian dollars by buying an inter-listed stock in the US markets and selling it on the TSX. The effective cost for converting to Canadian dollars to US dollars using this method works out to 63 basis points. But since the fee is more or less flat, you can save substantial amounts in conversion charges for larger sums of money. It should be pointed out that this method involves taking on the risk that the market moves sharply against you between the time you bought the stock on one exchange and phoned in the order to sell the stock in another exchange. Of course, the stock could move higher, which results in a lower conversion cost or perhaps, even leave you with a profit.

Updates

This strategy is popularly referred to as “Norbert’s Gambit” and is detailed on the Financial Webring Forum website.

Intelligent Speculator reports that this strategy is possible at National Bank Direct Brokerage (NBDB).

See the comments section below for how Charles in Vancouver saved on foreign exchange using “Norbert’s Gambit” at Credential Direct.

As I wrote in this post, the Horizons BetaPro US Dollar Currency ETF (DLR, DLR.U) offers a foolproof way to implement the Norbert Gambit.