If you’re travelling overseas, sending money overseas, or importing, then currency exchange rates are something you need to know. But, many people find them confusing.
Learning about currency exchange rates can open up the world. If you can learn how to calculate them, you’re one step closer to doing business with people from all over the globe.
AUD to PKR is a great example of a popular foreign currency exchange rate pair, but the principles we explain below are the same for USD to CAD, EUR to GBP, and all others.
Here we cover what the basic categories of currency exchange rates are and how you can read and calculate them. Hopefully, you’ll be able to trade your money for a better return in no time!
#1 – Learn the Categories of Currency Exchange Rates
There are several different types of currency exchange rates, and it’s important to know which describes the rate you’re looking at. The most common short-term exchange rates are known as full-market and interbank.
In a nutshell, the full-market rate is a midpoint of the bid/ask price quoted on financial markets, while the interbank rate is a midpoint between quotes by large banks.
In full-market and interbank exchanges, there is also often a spread added to the midpoint. If you’re trading with a company like Currency Online, you should be aware of which type of exchange rate will be used for your transaction.
#2 – Know How to Calculate Currency Exchange Rates
The first step in calculating currency exchange rates is to determine the current rate. This may sound obvious, but many people don’t do it correctly. You can look online where there’s many sources to find out real-time currency rates.
Once you have the correct rate, you need to figure out how much it is in your local currency. You can subtract one currency from another, but this can be a little tricky if you’re converting between different units of measure (such as dollars and euros).
Instead, you can use the current exchange rate (from your preferred currency converter) and then divide it by 100 to get your local currency equivalent.
The best way to become comfortable trading currency exchange rates is to practice, so you may want to get on a foreign exchange trading platform and start practicing.
Some people find it useful to use Microsoft Excel to help them practice. Excel has currency conversion spreadsheets that you can use, although you can of course just use a regular calculator and a piece of paper to convert between currencies.
#3 – Find the Price Movement of Currency Rates
Once you know what the current currency exchange rate is, you can see how much it has changed. The next step is to calculate your percentage change. This will help you figure out whether the majority of changes are up or down. This will help you to see whether a price has moved in your favour – or against it, and how much you’re making or losing on that day.
#4 – Get Prepared and Execute
Once you’ve practiced enough to get the hang of it, it’s time to do your actual trade. Make sure you follow all your learnings and know what prices you will enter and exit the market at.
Get used to using the currency exchange rate calculator you’ve chosen as part of your trading practice. It’s easy to overlook the small details of trading when you’re under pressure and start to make mistakes, particularly if you’re new at the trade.
Tools To Calculate Exchange Rates
#1 – The Currency Table
Currency tables are a great way to learn about different currencies. You can use them to see how currency exchange rates change over time and the percentage changes between different currencies. Knowing these can be very useful when trading foreign exchange.
#2 – Currency Converter
Luckily, there are some excellent currency converters out there (such as the one on Excel’s website). These calculators can help you convert one currency into another and are especially useful for calculating exchange rates.
#3 – Excel Spreadsheets
Because of its variety of functions and formulas, Excel spreadsheets are a great way to calculate foreign exchange. You can use them to convert different currencies into your local currency, as well as learn about how exchange rates have changed over time.