Find out how to calculate exchange rates with Clear Currency
3:11 PM June 30, 2022
Clear Currency explores currency conversion formulas, the different factors that impact exchange rate calculations, and why rates differ between banks and currency specialists.
An exchange rate refers to how much of one currency you can trade for another. Because these rates fluctuate so frequently, the value of your currency is constantly shifting. If you’re an individual sending or receiving money overseas or a business with international payment requirements, it is prudent to know how to work out currency conversions.
How are exchange rates calculated?
The trading of currency in the forex market involves the simultaneous purchase and sale of two currencies. During this process, the value of one currency (base currency) is determined by its comparison to another currency (quote currency) – particularly in terms of its perceived risk.
In a currency pair, such as GBP/EUR, the base currency is the pound and the quote currency is the euro. Therefore, if the current exchange rate is 1.17, you’ll get €1.17 for every £1 you spend.
Below are some of the factors that can affect global exchange rates:
Economic performance – A country’s economic performance is a key determining factor of the strength of its currency. A robust economy is more attractive to traders, providing support to the country’s currency. Whereas economic instability increases the perceived risk of a currency, weakening its value.
Interest rates and inflation – High inflation drives up the cost of goods and services, deflating the value of a currency. High interest rates make a country’s currency more attractive to investors because moving funds there offers a better return. A country’s interest rate policies are set by its central bank such as the Bank of England in Britain.
Trade balance – Countries that run a current account deficit by importing more than they earn from exports will see the value of their currency depreciate, while countries with a trade surplus will increase the value of their currency.
Political stability – A country with a low risk of political unrest is a more attractive proposition to traders than one with a political landscape that’s clouded by turmoil and uncertainty. Low risk therefore increases the value of the currency.
Why do exchange rates differ?
Each currency pair has a market rate – a benchmark rate that is available only to large financial institutions or those who purchase large volumes of currency. So, when you come to exchange a currency, you’ll find that the rate offered by a bank will differ. This is because they add commission fees and transaction charges on top of the market rate to make a profit on the exchange.
Sometimes these charges are hidden or inflated within the currency rate, making it important to shop around and compare the total cost of a currency conversion – bringing the cost-effective service provided by a currency specialist into sharp focus.
The different kinds of exchange rates
There are two different types of exchange rate:
Flexible – A monetary system in which the exchange rate is set according to market forces is known as a flexible exchange rate. The economic performance and political stability of the country determine the market demand and supply for its currency and, therefore, its value.
Fixed – A fixed exchange rate refers to a rate which the government and central bank set and maintain at the same level. This allows them to keep the value of the currency fixed against the value of other currencies.
How can I find and read market exchange rates?
To convert currencies, you need to know the exchange rate between them. You can find these online, in the financial press, or from a currency exchange provider. The currency conversion formula is a simple calculation: you divide the amount of currency you want to receive by the exchange rate to find out the equivalent in your local currency. For example, if you want to send €100 to the UK, you divide €100 by the exchange rate – let’s say 1.17 again – meaning it will cost you £85.47.
Use Clear Currency for your foreign currency transactions
Currencies are constantly fluctuating in value, making it essential to research the latest rates to find out how much it will cost to exchange them. Don’t be daunted by the forex market: empower yourself with an understanding of the variables that influence exchange rates, so you can exchange your currency with confidence.
Sign up today and Clear Currency will assign you a dedicated account manager who can help you successfully navigate the foreign exchange market and execute your international payments quickly and securely.
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