Exchange rate is what it costs to exchange one currency to another. It sways often during the week because currencies are being actively exchanged. That makes the price go up and down just like with other assets like stocks or gold. The market price of currencies (how many american dollars it is to buy canadian dollars) is priced differently from when you are exchanging currencies in a bank. Here you can read how exchange rates work and how to understand if you are getting a good deal.

Finding market prices

Traders and facilities buy and sell currencies 24 hours a day during the week. In order for an exchange to work you need to exchange one currency to another. To buy GBP you need to use another currency. Which ever currency is used, a currency pair is made. If USD is used to buy GBP, the exchange rate is according to GBP/USD pair. An access to these forex markets can be found through any forex brokers.

Counting the exchange rate

If the exchange rate for USD/CAD is 1.0950, it means that for one USD you need to pay 1.0950 CAD. The currency named first is always counted as one unit of that currency. The exchange rate shows, how much of the second named currency (CAD) you need in order to buy one unit of the first (USD). If you need to know how many USD you need in order to buy one unit of CAD, use the following formula: 1/exchange rate.

With this example in mind, it would be: 1/1.0950 = 0.9132. In order to buy one unit of CAD you need 0.9132 USD. That’s the price for CAD/USD pair (notice, that the positions of currencies have been changed). Yahoo! Finance shows the real rates of all currency pairs. If you are looking for an uncertain currency, click the button ‘Add Currency’, type in the two currencies and you’ll get the exhange rate.

Conversions distribution

When you go to a bank to exchange currencies, you will most likely not get the market price that traders do. The bank adds an extra charge to earn a profit, just like with credit cards etc. If the price of USD/CAD is 1.0950 the market says it costs 1.0950 CAD to buy one unit of USD. But in the bank that could cost 1.12 CAD. In order to get a percentage difference on that, take the difference of two seperate currencies and divide it with the market rate: 1.12 – 1.0950 = 0.025/1.0950 = 0.023. Multiply that with 100 to get the percent of extra charge: 0.023 x 100 = 2.23%.

Banks and currency exchange spots benefit themselves from this service. The bank gives you cash whereas traders in the market don’t deal with cash. In order to get the cash, transfer, processing and readout fees are applied to a forex user account.

Calculate your needs

You need foreign exchange? Use exchange currencies to figure out how much foreign exchange you need and how much local currency you need to spend in order to buy it. If you are in the USA and you are heading to Europe, you will need euros. You need to check the exchange rate of EUR/USD. The market rate may be 1.3330 but exchanging may be up to 1.35 or even more than that.

Lets pretend you have 1000 USD to buy EUR with. Divide 1000 USD with 1.3330 and you will get 740.74 EUR. That’s how many euros you will get for 1000 dollars. Since euros are more expensive than dollars, we need to divide it so that we get less euro units than dollar units.

Let’s now pretend you wish to have 1500 EUR and you want to know how much that is in USD. Multiply 1500 EUR with 1.35 and you will get 2015 USD. Since euros are more expensive, one euro will cost more than one dollar, which is why we used multiplying.

In conclusion

Exchange rates always apply to one currency compared to another. The position the currencies are in is very important (USD/CAD vs CAD/USD). Remember that the first currency always equals one unit and the second currency shows how much you will need of it in order to buy one unit of the first currency.