Currency exchange rates are a common sight for expats, travellers and international investors. While currency exchange rate quotes are relatively easy to find these days, reading and making currency exchange 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. We also provide a simple way of converting without needing an exchange rate calculator.
Finding and reading exchange rates
Currency exchange rates can be found in a number of different places, ranging from banks to specialty websites like Oanda, XE, Reuters or Bloomberg. Expats looking for simple conversions can often find rates posted in exchange houses or your local branch, while international investors trading in the foreign exchange ("forex") market can look towards their trading platform for real-time information.
FX quotes themselves are always given in pairs, since currency values are always relative to one-another. The Australian dollar, the U.S. dollar, the British pound or the EUR are among the most commonly quoted currencies. A very popular currency pair is the AUD/USD, which is the number of U.S. dollars needed to purchase one Australian dollar (i.e. 0.8000 USD per 1 AUD).
These currency pairs fluctuate all the time due to various economic factors, including supply/demand, various economic indicators, global news and events, 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 currency exchangers generate revenue by charging a wider spread/margin 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 a currency exchange platform, that offer the most attractive and fair exchanges rates.
How to Calculate without Relying on a Exchange Rate Calculator
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 needing to send larger amounts to family or friends overseas or analysing 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 AUD/USD exchange rate is 0.8000 and you'd like to convert $100 Australian dollars into U.S. dollar. To accomplish this, simply multiply the $100 by 0.80 and the result is the number of U.S. dollars that will be received – 80.00 in that case. Converting U.S. Dollar to Australian dollars involves reversing that process by dividing the number of U.S. dollars by 0.80 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 Australian dollar 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 Australian dollars.
Now you know how to convert your money without using an exchange rate calculator.
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. Expats and travellers 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:
FlashFX you can access the exchange rate calculator on the front page to convert AUD to and from alternate currencies. You are also able to compare exchange rates and fees in a comparison table.
The Bottom Line
It’s worthwhile for any currency conversion to shop around for suitable exchange rates and understand what fees you are paying. While some offer you competitive exchanges rates, but then they are hiding their margin in a disclosed/undisclosed fee. Hence, its best to calculate how much you are sending versus how much you are receiving. A currency calculator that will have highlight the rates and associated fees is recommended.