Wednesday, October 20, 2010

Using RBC Direct Investing for Norbert's Gambit (Part 1)

I'm a Canadian with a US employer. I periodically acquire stock in my company through an employee stock purchase plan. Selling this stock results in a regular influx of USD to my account, and the expected currency conversion fees when I convert back from USD to CAD.

I hate currency conversion fees.

Right now my bank (RBC) will let me convert currency online but the effective fee is 0.965% of the transferred amount. I've been looking for a while for alternative ways of converting currency to reduce these fees.

One option I considered is opening my own forex trading account, and I did via Oanda (http://www.oanda.com). I never got around to using them though. A co-worker of mine did though and he reports it was effective and considerably cheaper than going through the bank. What I don't like about this solution is it requires transfering money via a wire transfer both ways.

Then I read about a method for conversion called Norbert's Gambit. Here's the basics of how it works.

First you identify an interlisted stock (a stock that is listed on both the NYSE and TSX) like RY (Royal Bank). While interlisted stocks have separate prices on both exchanges, market efficiency keeps the ratio of their price very close to the current exchange rate from USD to CAD.

Next, to convert USD to CAD, you first spend the USD you want to exchange on your selected Interlisted Stock on NYSE, and then immediately sell an equal number of shares of the same stock on the TSX.

When the dust clears - you have converted your cash from USD to CAD (minus two stock trading fees).

Sounds great, but how does it work in practice? In my next post I'll discuss the result of two separate attempts at Norbert's Gambit using online broker RBC Direct Investing (one from USD to CAD, one from CAD to USD).

Disclamer: Talk to your broker before attempting to use this process to convert USD to CAD

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