How to Calculate Currency Exchange Rates – When it comes to calculating the price of goods or services rendered physically is pretty straightforward and easier. You just multiply the number of times by their cost to arrive at as money value for the exchange.
When it comes to buying and selling currency, it is quite different from the normal we are so much familiar with. Trading currency requires a different method of calculation to arrive at an exchange rate, this can leave you worried and you will displace any thought of buying and selling currency, which can make you miss yielding investment opportunities.
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Taking time to understand and learn what currency exchange rate is worth, you will be exposed to it do you have plans to make a purchase abroad.
In this article, I will give a summary that will help you understand what is needed for you to do to achieve this.
How to Find Market Exchange Rates?
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Reading an exchange rate
When we talk about currency trading it simply means exchanging money for money. This requires the application of an exchange rate and whatever currency is used will create a pair
For example: if USD dollars are used in buying British pounds, the exchange rate is USD/GBP for the pair.
To read the exchange rate, let’s say the USD/GBP is 1.05. This means it costs 1.05 British pounds to purchase 1US dollar.
The major currency is the first listed in the exchange quotes, and it always represents 1 unit of that currency.
However, the exchange rate simply displays how much of the second currency is needed to purchase 1 unit of the base currency.
Conversion spreads
In situations whereby you use banks, or other financial institutions to convert currencies a markup will be added to the market price, which allows them to make a profit.
This disparity between market price and the markup price is called conversion spread. To calculate the conversion spread, take the difference between the market exchange rate and the markup exchange rate and divide it by the market exchange rate.
If the market exchange rate is 1.25 GBP to buy 1 USD dollar (USD/GBP), and the bank or any other financial institutions, in general, is charging 1.30 GBP to buy 1 USD dollar, then the disparity is 0.05 (1.30 – 1.25).
Proceed to divide the difference by the market exchange rate (0.05/1.25), which equals 0.04.
Then multiply 0.04 by 100 (0.04 x 100) to get a conversion spread percentage of 4%.
The closer the exchange rate is to the market exchange rate, the more money you acquire.
How to calculate Currency exchange rates
There are two options to convert foreign currency, that is from the base and to the base.
When you are converting foreign currency from the base, you multiply by the exchange rate. So, if we need to convert 8 British pounds into US dollars, and the exchange rate is GBP/USD 1.20, then you multiply 8GPB x 1.20 per British pounds = 9.6 GBP
When you convert from the base simply divides by the exchange rate.