Clarification for Travelers and International Investors

Exchange rates are a common sight for everyone from simple travelers to international investors. While exchange rate quotes are relatively easy to find, reading and making calculations based on them can be a little more difficult. In this article, we’ll take a look at how to read and calculate exchange rates, as well as explore how they are influenced.

Finding and Reading Exchange Rates

Exchange rates can be found in a number of different places, ranging from commercial banks to specialty websites like XE.com. Travelers looking for simple conversions can often find rates posted at airports or local banks, while international investors trading in the foreign exchange (forex) market can look towards their trading platform for real-time information.

Quotes themselves are always given in pairs, since currency values are always relative to one-another. Of course, the U.S. dollar and euro are the two most commonly quoted currencies given their status as a reserve currency at many global central banks. The most popular currency pair is therefore the EUR/USD, which is the number of dollars needed to purchase one euro.

These currency pairs fluctuate all the time due to various economic factors, including supply/demand, various economic indicators. commercial/hedging activity, and hedge fund/financial trading. While these fluctuations happen all the time, the changes amount to just fractions of a currency’s value, known as pips (e.g. a USD pip is worth $0.0001).

How to Calculate Exchange Rates

Calculating exchange rates may seem simple on the surface, but it’s easy to confuse for those without much memory of mathematics. While converting $100 to foreign currency when traveling isn’t a big deal, converting currencies when analyzing a foreign stock’s financial statements can mean big differences for international investors.

Let’s look at an example of how to calculate exchange rates :

Suppose that the EUR/USD exchange rate is 1.20 and you’d like to convert $100 U.S. dollars into euros. To accomplish this, simply divide the $100 by 1.20 and the result is the number of euros that will be received — 83.33 in that case. Converting euros to U.S. dollars involves reversing that process by multiplying the number of euros by 1.20 to get the number of U.S. dollars.

An easy way to remember this is to multiple across left-to-right and divide across right-to-left, with the ending currency being the desired output of the calculation. In the example above, we divided across right-to-left to determine how many euros we could purchase with U.S. dollars and then multiplied across left-to-right to see how many U.S. dollars we’d receive from euros.

Useful Tools & Points to Remember

Reading and calculating exchange rates aren’t very difficult, but small errors can lead to big mistakes in some cases. International investors and travels alike can use free tools to help reduce the likelihood of making an error and double-check their own work before making a potentially costly mistake that’s difficult to undo.

Here are some useful tools to use:

• XE.com — Leading source of currency information that includes an exchange rate calculator for many major currencies around the world.
• Yahoo Finance — Leading portal for financial news and analysis that also has a useful exchange rate calculator for many major currencies.