How to Calculate an Exchange Rate

Currency exchange rate

What’s an Exchange Rate? 

An exchange rate tells you the implied cost upon exchanging one local fiat currency for another. If your near-term plans involve traveling abroad, this article will help you better comprehend how to find and then calculate a currency exchange rate.

How Does the Currency Exchange Market Work? 

Independent traders and financial institutions alike trade currencies professionally, on a 24-hour basis over what’s called the Foreign Exchange market (FOREX). This exchange can be accessed through any major brokerage dealing in currency trade. You needn’t use the FOREX market to make a currency exchange, however.

The sources from which you might find an exchange rate are varied. Most frequently, travelers encounter exchange rates at airports. It’s important to note that, while airport money exchange businesses don’t collect a commission, they do charge a much larger conversion spread than those you might discover at a bank. Do keep this in mind if you intend to exchange a substantial sum of money.

Of course, another source for exchange rates is the rate you find advertised at your local bank. While these rates might be better than those you’ll encounter at an international airport, they’re not the same as the real-time data being received by FOREX traders working with their professional trading software of choice.

When shopping for the best available exchange rate, you’ll first want to understand how to read one. Let’s take as a common example in the US dollar and Canadian dollar as a currency pair. If the USD/CAD pair is 1.33, then it will cost you 1.33 USD to purchase 1 CAD. This first currency listed (USD) will always reflect 1 unit of currency only. The second unit listed will reveal how much of the second currency (CAD) is required to exchange it for a single unit of the former (USD).

To determine how much domestic currency you’ll need to buy the desired sum of local currency at your next destination, you must know the Exchange Rate Formula. It’s not overly complicated and reads as follows: Exchange Rate = Money in Foreign Currency / Money in Domestic Currency. Likewise, you might alternately calculate it under this relationship: Exchange Rate = Money in After Exchange / Money Before Exchange.

If, for instance, you have USD 2000 to buy currency in euros, and the exchange rate is 1.211. To determine the monies after the exchange, all you do is divide USD 2000 by the exchange rate, 1.211. The equation yields that you’ll have EUR 1651.52 in exchange for USD 2000.

Let’s assume that you must have EUR 2000 to cover your expenses. To complete this calculation you simply multiple the exchange rate, 1.211 by 2000 EUR. In this case, you will need USD 2422 to convert that EUR 2000 sum. An easy equation, you’re only required to know the exchange rate and either how much domestic currency you have or how much foreign currency you require.

Understanding where to find an exchange rate and how to use it to calculate your expenses should offer some peace of mind as you prepare your next overseas travel budget. If you’re not comfortable manually completing the math, you can always access a free exchange rate converter online to help estimate expenses for your upcoming trip.