Official Versus Parallel Exchange Rates: When Two Prices Exist

[Fairman]

Official Versus Parallel Exchange Rates: When Two Prices Exist

In some countries, the official exchange rate set or managed by the central bank is not the rate at which people can actually buy foreign currency. A second, unofficial market, often called the parallel or black market, trades at a different price.

This happens when demand for foreign currency exceeds supply at the official rate, usually because the central bank is limiting access or holding the currency artificially strong. People who cannot get dollars officially turn to the parallel market and pay a premium.

The gap between the two rates tells you a lot. A wide spread signals that the official rate is unrealistic and that pressure for devaluation is building. When governments finally allow the official rate to adjust, the gap often narrows quickly, though the move can be large.

For a trader, this matters in two ways. Quotes from your broker for such currencies may reflect the official rate or a market rate that you cannot trade in practice. And money moving in or out of the country, including deposits and withdrawals, may be converted at one rate or the other, creating hidden costs.

Anyone funding a forex account from a country with controls should compare the effective conversion cost of each payment route.

Practical step: calculate the real cost of converting local currency to your account currency through each available channel, and compare with the official rate.

[Fairman]

This one is very real for anyone funding from a country with currency controls. The rate on the broker's deposit page and the rate you actually get through your bank or a payment agent can be far apart, and that gap is a cost before you've placed a single trade.

[Fairman]

Also count both directions. People check the deposit rate and forget that withdrawals get converted back too, sometimes through a different channel at a different rate. Run the numbers on a round trip before choosing a method.