What is an Exchange Rate?
An exchange rate is used to represent the price of two currencies against each other, for example pounds to Euros or dollars to pounds. The dollar-pound exchange rate is used to determine how many dollars you will get for every pound that you spend.
When looking at exchange rates, there are two key terms to be aware of:
- Consumption Basket. When you hear this in relation to a country, it purports to the goods and services that are purchased or consumed by the average person in that country.
- Real Exchange Rate. This uses a nominal exchange rate and a ratio of prices for the shopping baskets of two countries. The real exchange rate will compare the prices of two consumption baskets in the relative currencies.
But what does this have to do with applying for jobs? Well, when you apply for certain graduate opportunities, you may be asked to sit a test that evaluates your skills in calculating exchange rates and currencies. Or you may be applying for a role that requires you to use these skills on a regular basis.
How to Read Exchange Rates
Current exchange rates can be found in banks, Post Offices, Bureaux de Change and of course online markets. Exchange rates may vary depending on individual need: a traveller would be comparing travel exchange rates, whereas a business consultant might require forex trading platforms for real-time information.
When you obtain a currency exchange quote, it is always provided in pairs. This is because currency values are always relative to each other. The US dollar and Euro are the two most commonly quoted currencies, partly because each is a ‘reserve currency’, meaning that central banks can use that currency to pay off international debt.
The first currency of any pair is referred to as the base currency. The second currency is the terms currency. Each currency pair will identify how much ‘terms’ currency you will need to purchase a single unit of ‘base’ currency.
How to Calculate Exchange Rates
Knowing how to calculate exchange rates correctly means you’re less likely to be overcharged on travel money, among other things. The calculations are rarely complex, though they can be challenging if your numerical skills aren’t the best.
The majority of currencies are quoted directly against the US dollar. When you receive a ‘direct quote’ this will usually be for the amount of foreign currency that you will need to buy or sell one US dollar.
As an example, let’s say a company from the UK is billed by a supplier for US$50,000.
It obtains a currency quotation, with the exchange rate for GBP to USD at 1.359.
Therefore, every pound will buy US$1.359.
To work out how much this would cost, you would divide the amount that has to be paid in dollars (50,000) by the exchange rate, which is 1.359. The total amount that the business would have to pay in GBP would be (50,000/1.359) = £36,792 to their supplier.
Online Tools You Can Use To Calculate Exchange Rate
To avoid human error, you can use a range of free tools to work out exchange rates.
Note that these sites give you the actual exchange rate. A bank (and especially an airport bureau) will offer you a much less favourable rate, as they take a percentage on each exchange.
Tips on Getting The Best Exchange Rates
When comparing exchange rates, it is always good practice to work out the mark-up being added by the operator, which you can do by comparing the exchange rate that you are being offered with a general exchange rate that you can find through Google search.
Purchase your currency in advance, and research online who is offering the best price. Buying currency from the first place you find should be avoided, as should exchange bureaux at airports.
Be aware of double exchange rates, particularly if a shop or restaurant offers to convert the price back into your home currency. Where this happens, they will choose their own rate and it will always work out more expensive.
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