How to perform Norbert’s Gambit on Questrade

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    • What is Norbert’s Gambit?

    If you’re accustomed to converting currencies through your online bank or brokerage, chances are you’re unknowingly incurring fees hidden within the exchange rate. For instance, while the going rate for USD may be $1.28 CAD, your brokerage might quote you something closer to $1.30 CAD and pocket the difference.

    While this might seem insignificant for smaller transactions, it becomes a significant concern when converting larger sums for purposes such as vacations or investing in American stocks. However, there’s a clever technique known as Norbert’s Gambit that can help you circumvent these fees.

    The essence of Norbert’s Gambit is simple: if a stock is listed on both a Canadian and American stock exchange, you can purchase that stock in CAD and then sell it in USD. Ideally, if the market is efficient, the ratio of the stock price on the American exchange to the price on the Canadian exchange should precisely match the current USD/CAD exchange rate.

    However, a potential hurdle arises as the stock price may fluctuate during the time taken to execute the buy and sell transactions in different currencies.

    Fortunately, there’s a solution in the form of an ETF known by the ticker DLR.TO. This ETF is denominated in CAD and mirrors the USD/CAD exchange rate. Therefore, owning it exposes you to no more risk than if you had directly purchased USD initially. By acquiring this ETF, you effectively lock in an exchange rate at the moment of purchase, providing stability. Subsequently, you can sell your new ETF for USD by following these steps.

    Norbert’s Gambit on Questrade:

    1. Enter an order for DLR.TO in the trade window, exercising patience and adhering closely to the bid price to maximize benefits. (Note: The spread typically amounts to $0.01.)
    2. Calculate the number of shares required for purchase by dividing the desired currency conversion amount by the current share price of the ETF. For instance, if aiming to convert $10,000 CAD to USD and the share price is $12.50, you’ll need to purchase 800 shares.