How to calculate exchange rates?
Last updated: 02.12.2024
Learn how exchange rates work and how to calculate them
Key takeaways
- An exchange rate is the rate at which one currency can be exchanged for another
- It tells you how many units of one currency you can buy with a single unit of another currency
- WorldFirst lets you send and receive international payments with competitive exchange rates and zero setup fee
Calculating exchange rates can be overwhelming, especially when your business has to deal with international transfers in multiple currencies.
But, understanding exchange rates and calculating them in advance ensures your profit margins are always protected.
Exchange rates can fluctuate throughout the day as currencies are traded in the global markets. Prices can go up or down at any time.
In this guide, we look at everything you should know about calculating exchange rates.
Table of Contents
Understanding exchange rates
An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of one country’s currency when traded with another. Also called currency conversion rates or market exchange rates, they are determined by factors like economic activity, interest rates, unemployment rate, and GDP.
An exchange rate is usually quoted with the currency’s acronym. For instance, the exchange rate between the Australian Dollar and US Dollar is quoted as AUD/USD.
For example, if AUD/USD is trading at 0.75 it means that it takes 1 Australian Dollar to buy 0.75 US Dollars).
Different types of exchange rates
Here are the main types of exchange rates you can consider:
Fixed exchange rate
Fixed exchange rate is determined by the central banks. Also known as pegged exchange rate, it is usually determined against a major world currency like the US Dollar, Euro, or Yen.
The central bank buys and sells its currency in the forex market in return for the currency to which it is pegged, all with the goal of maintaining the exchange rate.
Floating exchange rates
With floating exchange rates, the prices are determined by the supply and demand for the currency pair in the forex market. A floating exchange rate doesn’t mean that countries don’t try to control their currency’s price. Governments and their central banks regularly try to control their currency prices to make it more favorable.
Economic and geopolitical factors like unemployment rate, interest rate changes, GDP, and manufacturing data can affect floating exchange rates.
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How to read an exchange rate
Exchange rates are represented as currency pairs where the first currency is called the base currency and the second is called the quote currency. The exchange rate basically tells you how many units of the quote currency you will need to purchase one unit of the base currency.
For example, let’s consider AUD/USD.
AUD is the base currency and USD is the quoted currency.
If the pair is trading at 0.75 it means that it takes 0.75 US Dollars to buy 1 Australian Dollar.
How to calculate the exchange rate when converting currencies
Here are the steps to manually calculate the exchange rate
Step #1: Determine the currencies you want to exchange
The first step is to finalize which currencies you want to convert. For instance, let’s say you want to convert Australian Dollars to US Dollars. The currency pair for that is AUD/USD.
Step #2: Find the current exchange rate
Exchange rates for currencies are not fixed and can fluctuate throughout the day. You can find the exchange rate for a currency pair by checking trading platforms, financial news websites, or even online currency conversion calculators.
A simple Google search can also open a currency exchange calculator and help you find the current exchange rate.
Remember that the exchange rate you’ll find online is usually the interbank/ mid-market rate. The exchange rate for the transaction will usually be higher than the interbank exchange rate.
Banks and payment providers add a markup to interbank exchange rates to profit from each transaction and cover operational costs.
You should choose a payment provider that offers competitive exchange rates. It’s always a good idea to compare exchange rates between different providers before initiating an international transaction.
Step #3: Finalize the amount to convert
Decide on the amount you want to convert. It can depend on the exchange rate or you may just have a fixed amount that needs to be converted. For example, if you are converting AUD to USD, you might choose to buy USD 1,000 regardless of the exchange rate, or you might want to sell AUD 1,000, regardless of how much USD you need to buy.
Step #4: Calculate the final amount
To determine the final value, multiply the exchange rate by the total units of base currency you want to exchange.
Let’s see some examples:
- If the exchange rate is 0.75 and you need to pay the supplier USD 1,000, you would need to buy USD 1,000, which will cost you AUD 1,333.33. (USD 1,000/ 0.75)
- If the exchange rate is 0.70 and you are receiving USD 1,000 from a customer that you wish to convert into AUD, you’ll need to divide USD 1,000 by 0.70, giving you AUD 1,428.57
Get access to competitive exchange rates with WorldFirst
WorldFirst aims to simplify international payments and collections for online sellers, SMEs, and global businesses. With WorldFirst, businesses can make fast, secure and reliable international transfers.
Your World Account lets you make and receive international payments like a local. You can pay in 40 currencies and access 20+ local currency accounts. For every transaction, you get access to competitive exchange rates.
We also cap our currency conversion fee at 0.60% for direct transfers and 0.8% for 1688 payments. There are no hidden fees.
You can easily convert funds between your local currency accounts and use your balances to pay suppliers or settle invoices in different currencies as needed.
You can also select your exchange rates with WorldFirst through firm orders, forward contracts, and spot contracts.
Ready to make international transfers at competitive rates? Sign up with WorldFirst.
Disclaimer: The information contained is general only and largely our views. Before acting on the information you should consider whether it is appropriate for you, in light of your objectives, financial situation or needs. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions, estimates, mentioned products/services and referenced material constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. WorldFirst shall not be responsible for any losses or damages arising from your reliance of such information.
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