How to Convert Money Exchange Rates

Foreign currency exchange rates are easy to calculate.

In FOREX markets, currencies are always traded in pairs. The numerator, or base currency, is always equal to one. The denominator, or quote currency, represents how many units of the quote currency can be purchased for one unit of the base currency. All exchange rates are relative; there is no absolute standard like gold by which to gauge a currency's value. In this example, we wish to know the exchange rate of British pounds (GBP) for Indian rupees (INR), but the only rupee price to which we have access is versus the U.S. dollar (USD).

Step 1

Find the USD/INR exchange rate. There are numerous online sites that can provide this rate, for example see Reference 1. In our example, we find the rate is 1 USD buys 45 INR, as of Dec. 31, 2010. The price of the INR in terms of dollars is 1 divided by 45, or 0.0222.

Step 2

Find the GBP/USD exchange rate. Since both of the currencies are considered majors, the rate can be found on any site featuring current exchange rates. For our example, the rate 1 GBP buys 1.54 USD, for a price of 1 divided by 1.54, or 0.6494.

Step 3

Cross-multiply the two currency pairs. Through cancellation, we are left with the currency rate we seek. In our example, USD/INR times GBP/USD gives GBP/INR, the pair in which we are interested. Substituting numbers to get the price, we get 1/45 times 1/54, or 0.0144. Dividing this price into 1, we get the ratio of 1 GBP buys 69.5 INR.

Tip

Currency prices are always quoted to at least four decimal places -- Japanese yen uses six places. Each change of .0001 is called a pip, which stands for percentage in point and represents the minimum recognizable currency price change. The prices quoted online represent the last trade in the currency pair, not the current bid/ask spread. Most major currency pairs have a bid/ask spread ranging from one to six pips, depending on the current volume of trading. Currency prices change rapidly and the market stays open 24 hours every business day, so daily closing prices are arbitrarily chosen to be those existing at 5 p.m. EST.

Warning

Travelers visiting a bank to exchange currencies should not expect to receive the current FOREX exchange rate. Banks build a charge into their bid/ask spreads and also may charge a transaction fee.

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