How to Read and Calculate Currency Exchange Rates
Exchange rates are a common sight for both travelers to international investors. While exchange rate quotes are relatively easy to find these days, reading and making calculations based on them can be a little more challenging for those that aren't familiar with the techniques. In this article, we will take a closer look at how to find and read currency exchange rates as well as some other tips to keep in mind when using them.
Finding and Reading Exchange Rates
Exchange rates can be found in a number of different places, ranging from commercial banks to specialty websites like XE.com. Travelers looking for simple conversions can often find rates posted at airports or local banks, while international investors trading in the foreign exchange ("forex") market can look towards their trading platform for real-time information.
Quotes themselves are always given in pairs, since currency values are always relative to one-another. Not surprisingly, the U.S. dollar and euro are the two most commonly quoted currencies given their status as a reserve currency at many global central banks. The most popular currency pair is therefore the EUR/USD, which is the number of dollars needed to purchase one euro.
These currency pairs fluctuate all the time due to various economic factors, including supply/demand, various economic indicators, commercial/hedging activity, and hedge fund/financial trading. While these fluctuations happen all the time, the changes amount to just fractions of a currency's value, known as "pips" (e.g. a USD pip is worth $0.0001) by those trading currencies.
It's also worth noting that many airport currency exchangers generate revenue by charging a wider spread between the currencies. In the words, they don't charge and outright 'commission' or 'fee', but they make money by exaggerating the exchange rate differences. Most consumers can get the best deals by exchanging currencies through their local or foreign banks that offer the most attractive and fair exchanges rages.
How to Calculate Exchange Rates
Calculating exchange rates may seem simple on the surface, but it can be confusing to those that don't remember mathematics from school. While converting $100 to foreign currency when traveling isn't a big deal, converting currencies when analyzing a foreign stock's financial statements can mean big differences for international investors trying to make investment decisions. Let's look at an example of how to calculate exchange rates:
Suppose that the EUR/USD exchange rate is 1.20 and you'd like to convert $100 U.S. dollars into Euros. To accomplish this, simply divide the $100 by 1.20 and the result is the number of euros that will be received - 83.33 in that case. Converting euros to U.S. dollars involves reversing that process by multiplying the number of Euros by 1.20 to get the number of U.S. dollars.
An easy way to remember this is to multiple across left-to-right and divide across right-to-left, with the ending currency being the desired output of the calculation. In the example above, we divided across right-to-left to determine how many Euros we could purchase with U.S. dollars and then multiplied across left-to-right to see how many U.S. dollars we'd receive from euros.
Travels may only be interested in calculating to a relatively low degree of accuracy, such as cents, but currency traders that are highly leveraged pay attention to each pip. A small fluctuation in a currency can have a big impact for a trader that has borrowed $1,000 for each $1.00 committed to a trade or an international investor determining the impact of a $0.0001 difference on $1 billion in revenue.
Useful Tools & Points to Remember
Reading and calculating exchange rates aren't very difficult, but small errors can lead to big mistakes in some cases. International investors and travels alike can use free tools to help reduce the likelihood of making an error and double-check their own work before making a potentially costly mistake that's difficult to undo. Here are some useful tools to use:
- XE.com - Leading source of currency information that includes an exchange rate calculator for many major currencies around the world.
- Yahoo Finance - Leading portal for financial news and analysis that also has a useful exchange rate calculator for many major currencies.
There are also many apps on the Google Android Play store and the Apple App Store that can help determine exchanges rates on the spot. Again, it's important to note that these exchange rates may differ from the exchange rates at many airports and banks that may charge a spread.
The Bottom Line
Exchange rates are commonplace for both travelers and international investors. While exchange rate quotes are relatively easy to find, reading and making calculations based on them can be a little more challenging. Investors can use many different online resources to help calculate exchanges rates on the spot or familiarize themselves with the basic mathematics needed to calculate exchanges rates by hand. This can help save a lot of time and money, especially when dealing with significant amounts of money.