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How to Calculate Exchange Rates?

Susan Kelly

Jan 05, 2022

If you travel internationally, you most likely need to exchange your money for the currency of the country that you are visiting. An exchange rate is a rate that tells you how much one currency will be exchanged for another currency. Exchange rates fluctuate regularly because the currency's value is changed constantly due to the economic actions of the central bank or government of that country. The prices go up and down throughout the week.


Exchange rates are important to everyone, especially investors and travelers. Nowadays, it's easy to find exchange rates. Let's take a closer look at how exchange rates work and how they are calculated &''' read.


Reading and Finding Exchange Rates


Exchange rates are determined by trading in foreign exchange. Traders buy and sell currencies 24 hours a day. For trading, one currency is used to buy another currency. For example, if you want to buy EUR, you may need another currency to buy it. Like, if USD is used to buy EUR, the exchange rate pair will be EUR/USD. These currencies pairs change all the time because of economic factors


The exchange rate is calculated by the following formula: Exchange rate= First Currency/ Second Currency.The first currency listed in the pair EUR/USD is equal to one unit of that currency and the second currency is the currency that costs the price to buy one unit of the first currency.


The following formula is used to find how much will it cost to buy 1 USD using EUR: 1/ Exchange Rate.For example, if the EUR/USD price is 1.113. We will do the calculation using the formula. 1/1.113. It means it will cost 0.8984 USD to buy one EUR.


Conversions


The market price of a currency is different from the rates at currency exchange house and banks exchange rates. Therefore, when you go to them to convert currencies, they don't do conversions at the market rate. Banks, Credit cards, and currency exchanges deduct their profit from currency conversions.



If you want to convert 1000 USD into euros. The exchange rate of EUR/USD is 1.12. Divide the 1000$ by 1.12. The result is 892.9 euros. If the pair is USD/EUR, you'll multiply the euros by the exchange rate to get USD. Because euros are more expensive.


On the other hand, if the market is saying that the exchange rate of EUR/USD is 1.12, the banks and exchanges may charge 1.15. To get their profit percentage, take the difference between both exchange rates 1.15-1.12=0.03. Now, divide it by the market exchange rate: 0.03/1.12=0.02. Now, multiply it by 100: 0.02×100= 2%. It is the percentage markup of their profit.


Requirements


If you need a foreign currency and you want to exchange your domestic currency, use exchange rates &''' calculate your requirements to determine how much your domestic currency will be needed to buy foreign currency. It is good to exchange currency at banks rather than exchange companies because they charge pretty high prices than real market prices.


You can find the current exchange rate of that currency online on your mobile phone. Also, if you dealing with large numbers and going to a country where the inflation rate is high, carry an exchange rate calculator with you to help in calculations.


What Factors Affect Exchange Rates?


Exchange rates change frequently because they depend on numerous factors such as inflation, financial stability, interests, and the supply of money. Inflation happens when there is too much money in circulation and it results in a decrease in currency value. The excess in money means the currency is not worth as much. Then, it loses its value in forex which affects exchange rates. The money supply is the key factor that affects the exchange rate and inflation.


Interest rates are closely related to the exchange rates. Higher interest rate increases exchange rates and vice versa. When interest rates decrease, the currency's value goes down and when interest rates increase, the currency becomes valuable. The actions of governments and central banks are also one of the factors that affect the exchange rates.


The country's financial stability and economic strength play a significant role in determining the exchange rate. If the country would be financially unstable, investors and traders will move their capitals to other stable countries. Also, poor political stability devalues the value of a country's currency. These factors can affect trade with other countries &''' affect exchange rates at the macroeconomic level.


The Bottom Line


Exchange rates tell you how much currency is worth in another currency. You have to remember the order USD/EUR. In this order, the first currency which is USD will be equal to one unit, and the second currency EUR is the currency that is needed to buy the one unit of USD.


The exchange rate tells you how much it costs to purchase one USD using EUR. You can calculate exchange rates and conversions by learning just the basic math. This can save your time and money and you'll figure out whether you're getting a good deal or not.


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