When it comes to exchanging currencies, it’s not always obvious at first what the numbers in an exchange rate actually mean.
We’ve written this article to make things easier. We’ll explain exactly how exchange rates work so you’ll know exactly how much of one currency you’ll be able to swap for another. We’ll also explain:
- How to work out how much money to exchange
- How to make sure you’re getting a good exchange rate
How do you read an exchange rate?
Currency exchange rates are quoted in pairs.
For example, the exchange rate for the pound sterling (GBP) and the US dollar (USD) may be quoted as something like this:
GBP/USD = 1.1970
In an exchange rate quotation, the first currency (on the left) is referred to as the base currency. The second currency (on the right) is referred to as the quote currency. What the exchange rate tells you is how much of the quote currency you need to buy 1 unit of the base currency.
In this example, you’ll need 1.1970 US dollars (USD) to buy 1 pound sterling (GBP).
Another way of looking at this is that 1 pound sterling is worth 1.1970 US dollars.
That’s the most important thing to know when it comes to understanding exchange rates. Now, when you see an exchange rate, you’ll know what rate is on offer.
As you probably know, exchange rates fluctuate all the time. It’s a good idea to check what the current rates are every time you exchange currencies. Take a look at our currency converter to see live exchange rates for currencies from all over the world.
How do you calculate a currency exchange?
When it’s time to actually exchange currencies, you’ll need to work out how much money to exchange.
You’ll need to know either:
- How much you’ll get if you buy a foreign currency with your own
- How much of your own currency you’ll need to buy a certain amount of another currency
Let’s look at another example:
EUR/ZAR = 19.3098
This is an example exchange rate for the euro and the South African rand. As you now know, at this exchange rate you need 19.3098 South African rand to buy 1 euro. The alternative way to look at this is that 1 euro is equal to 19.3098 South African rand.
Let’s say you’re travelling from South Africa to Europe for a short trip.
Option 1 – You have a budget in the currency you want to sell
If you have a budget of 20,000 ZAR, you’ll want to know how many euros your 20,000 ZAR will get you.
To do this, using the exchange rate above, you’ll need to divide the quote currency (the second one) by the exchange rate.
You should divide your 20,000 ZAR budget by the exchange rate of 19.3098. This will give you 1,035.74 EUR.
Option 2 – You have a budget in the currency you want to buy
Alternatively, you may know how much you will need in Euros, for example 1,000 EUR. In this case, you’ll want to know how many ZAR you’ll need to sell to make your 1,000 EUR purchase.
To do this, you should multiply the base currency by the exchange rate.
In our example, this means you should multiply 1,000 by 19.3098. What this means is that you’ll need 19,309.80 ZAR to make your 1,000 EUR purchase.
Find the best deal for your money transfers
Whether you use your own bank or an FX provider to exchange your currency, the ‘client rate’ will always differ compared to the ‘mid-market rate’, also called interbank rate. It simply means that your service provider will adjust the exchange rate so they make a small profit on your money transfers.
High street banks are by far the most expensive, as they usually mark up an exchange rate by 4-6%. This represents a non neglectable extra cost and can add up fast.
This is why we encourage you to use our comparison tool to find the cheapest & fairest deal. It pays to shop around!
Duncan Colquhoun
Author
