While travelling to an exotic international destination or dealing with international clients, we are bound to think about a key financial aspect – currency exchange rates. But before we find out how to read currency exchange rates, let us figure out the basics. For instance, do you know what a base currency is?
What are base and quote currencies?
Currency exchange rates are expressed in pairs. Generally, the first currency is to be exchanged for the second one. The base currency is the currency that is considered to be exchanged for use in a particular country. In simple words, it is the currency you possess.
However, the base currency is only one aspect of the transaction. What about the currency that you need? The currency you want your money to be converted into is the quote currency. The definition of base currency is incomplete without a mention of the quote currency.
So, now that you know about base and quote currencies, here’s a quick guide on how to read currency quotes.
Also read: Factors Influencing Exchange Rates
Compare and contrast
While travelling abroad or doing business with people globally, one needs to be aware of the foreign exchange rate of their base currency vis-a-vis the needed quote currency. Thus, it is very important to know how to calculate the exchange rate of the base currency.
If you want to calculate the value of a particular currency, you would generally compare it with another currency. This comparison comes in the form of a mathematical equation, which we shall look at shortly.
We have so far established that the first currency or the currency to be exchanged is called the base currency, and the second one is called quote (or terms) currency. The comparison is drawn on the basis of how much quote currency can be purchased for a single unit of the base currency.
How does it work?
In the market, traders and financial institutions buy and sell currencies constantly. When a trade happens, a particular currency is exchanged for another currency. It is via this process that we can calculate the foreign exchange rate and trade accordingly.
Imagine you’re offered an exchange rate of 1.02 for the USD/CAD pair. This means if you exchange 1 US dollar you will get 1.02 Canadian dollars. Going by this exchange rate, you can know how many US dollars can be bought in exchange for your Canadian dollars.
There are plenty of online sources where you can calculate these exchange rates, but you would have to do some research to scope out the most authentic and up-to-date sources. Since foreign exchange rates fluctuate constantly, you have to get the exact exchange rate for that particular time for your calculations.
Be aware that most financial institutions don’t follow the market rates of the traders and usually mark-up currency exchange rates to make profits.
How to calculate foreign exchange rate?
If you need a particular foreign currency, you have to first check the foreign exchange rate. But the question is: how do you calculate the foreign exchange rate?
The first thing would be to know your base and quote currencies. The exchange rate will involve this pair. Next, you have to know how to convert them. If you have determined the euro/USD exchange rate as 1.10 and you want to convert 10 US dollars into the base currency (euro), you have to divide 10 by 1.10 to arrive at the result (around 9.09 in this case). This will be the amount in euros that you will get from 10 USD.
Therefore, to read currency exchange rates and understand them, you have to know the currency pairs first.
What are the major currency pairs?
The most exchanged currencies are also called major currency pairs. The USD finds a place in most conversions, owing to the dollar’s monopoly in the international economy. Some major currency pairs are EUR/USD, CHF/USD, GBP/USD, and CAD/USD.
Exchange rates hold the interest of international investors as well as travellers. To do business with international entities, you have to be familiar with the major currency pairs. Also if you decide to travel to any place in the world, you have to budget your expenses according to the currency of your destination. For this, you have to know the exact currency exchange rates of that place.
It can be challenging to read the currency exchange rates and make calculations. Professional investors have access to online resources that throw up the exact exchange rate instantly and allow easy calculations. However, casual travellers may find it tough. Not being aware of the right sources, they could easily end up spending more or even get cheated.
Worry not! Xpress Money, a trusted name in international money transfers, can help you stay up-to-date with competitive exchange rates through its currency calculator.
Calculating currency exchange rates starts with identifying the base currency and the quote currency. Bear in mind that currency exchange rates are merely a mathematical equation. Once you know the correct rate, you can easily determine how many units of the quote currency you can get from ‘x’ units of the base currency.
There are many online resources that can help you determine the appropriate value of your currency while travelling. However, since there are a lot of dubious options available on the internet, make sure you identify the most reliable ones. Xpress Money, for instance, can help you calculate competitive exchange rates for safe and secure money transfers to more than 170 countries.