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How to Calculate An Exchange Rate

When you’re dealing with any kind of international transaction or transfer, one of the most important numbers to consider is the exchange rate. Many people take the route of searching for exchange rate between the two currencies on Google, seeing what comes up and going with that, but it’s not that.

For one, exchange rates aren’t static, not only do they fluctuate daily, they may even change hourly meaning you always have to stay on top of what’s going on and how the rates are changing. But, there’s even more to consider then that. The rate you get on Google is a reflection of the base exchange rate, one being traded globally between banks around the world. However, that’s not the exchange rate you’d receive from the bank or another financial institution.

If you’re looking to maximize your savings and get the best currency exchange rates it can be daunting to consider all the places you can go and the frequently changing exchange rates.  That’s why this guide will help you understand how to calculate the exchange rate, what to look for and how best to save with Knightsbridge Foreign Exchange.

How to Calculate Currency Exchange Rates

On the base level, calculating an exchange rate is simple and easy, as all you need to do is punch the numbers into a calculator to figure out what the conversion is. Say you just got paid $100 USD from a client and now you need to calculate it into CAD. You can search USD to CAD and Google will pop up with the rate; as of this writing, it’s 1.31. That means you multiply USD 100 by 1.31 and get USD 131.

If you reverse it, as of this writing, Google shows CAD 1 equal to USD 0.76. The calculation on CAD 100 to USD would be $76. If you calculate $131 by 0.76, it’s approximately $99.56. For many, this is where the confusion starts, because they may be within cents of each other, it isn’t a one to one calculation. But, that’s just to start.

It’s also important to remember that the rate Google shows isn’t the precise rate you’re receiving. Whether you do a currency exchange through a bank or another financial institution or buy something online in another currency, there are various factors to consider as to why you may get a different rate from one place to another.

Why Are There Different Exchange Rates

Earlier we noted that the exchange rate on Google isn’t the actual exchange rate you’d receive. That’s because the rate you see on Google is the rate the bank buys the currency at, and then they sell it to you with an added markup. Think of it like buy an item from a store. Manufacturers will sell their items to stores at a wholesale price, generally, offer a suggested retail price that the store sells it at. That’s markup, and for the store, it’s that margin that makes them money.

It’s the same idea with the currency exchange rates, where the global trading market acts as the manufacturer, and the bank (or another financial institution) acts as the store, adding a markup and selling it to you. What this does is allow each bank and institution to implement their exchange rate and compete. Companies can watch what others provide and look to undercut them as all other businesses do. For the consumer, the information is out there and available, allowing you to make the right decision for you. Knowing what exchange rate is fair and what isn’t, along with the services and pros and cons each institution brings are important reasons for deciding what’s best for you.

How to Find The Best Currency Exchange Rates

If you want to see just how much your bank or another financial institution may be charging you above the base exchange rate, then you’ll want to start by gathering the different exchange rates. Google will have this information readily available, as you have to search that rate. If you’re exchanging from USD to CAD, then search USD to CAD. As noted earlier, as of this writing that number is 1.31, and the number we’ll use for this example.

Next, you’ll want to get the exchange rate from your bank or another financial institution you may be exchanging with. There are so many factors that go into the markup added to that exchange rate, including the country, how you’re exchanging (if it’s a money transfer to another party), the amount you’re exchanging and more! For the purpose of this example, let’s say the rate the bank offers is 1.28.

From there you’ll want to find the percentage difference by first subtracting the bank’s rate from the market rate (1.31-1.28 = 0.03). Then, you’ll want to turn that into a percentage by dividing it by the original rate and multiplying that number by 100 (0.03/1.31 = 0.0229 x 100 = 2.29). When rounding up, that’s about a 2.3% difference, which may seem small but adds up the more you’re exchanging. For $100,000, that’s a $2,000 difference, and typically the bank has an even higher markup in reality.

If you’re ever unsure of an exchange rate seems fair, that calculation will show you the percentage added, giving you an idea of what they’re making and allowing you to compare bank to bank and more! However, for Canadians there is an even easier way to always ensure you get the best currency exchange rates; Knightsbridge Foreign Exchange.

The Advantage of Knightsbridge Foreign Exchange

At Knightsbridge Foreign Exchange, we provide fast, easy and convenient exchange services that always deliver the best currency exchange rates in Canada. In fact, we do the work for you as we monitor the rates of major banks and other financial institutions, allowing us to ensure we provide the best rates available. We have no transfer or transaction fees, providing you with the best value on currency exchanges in Canada.

By Victor | November 8, 2018 | Guides | 0 comments

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