How to Calculate Exchange Rates (Get The Best Rate)

Whether sending money to family abroad, paying for services in another country, or handling business transactions across borders, the rate at which your currency converts to another can significantly affect the amount of money that ends up on the other side.

Exchange rates determine how much one country’s currency is worth in another country’s currency and can fluctuate due to a variety of economic and geopolitical factors.

An exchange rate is essentially the price of one currency in terms of another.

It's a cornerstone of the global financial system, impacting everything from individual spending abroad to the financial strategies of multinational corporations.

When you send money abroad, the exchange rate dictates how much foreign currency your recipient gets for each unit of your sent currency. For instance, an exchange rate of 1.35 GBP/USD means that 1 British Pound is worth 1.35 US dollars.

This value is influenced by the supply and demand dynamics in the foreign exchange market, where currencies are traded 24/7​.

For individuals and businesses participating in international currency transfers, getting a favorable exchange rate can mean more money received on the other end, and vice versa.

What Determines Exchange Rates?

The foreign exchange market, often referred to as Forex, plays a pivotal role in determining exchange rates.

It is the largest financial market in the world, where currencies are bought and sold, and their prices are determined in real-time.

The dynamic nature of this market ensures that exchange rates fluctuate constantly based on trading activity around the globe.

Several key factors influence these exchange rates:

1. Economic Indicators: The strength of a country's economy significantly impacts its currency's value. Economic indicators such as inflation rates, gross domestic product (GDP), employment figures, and retail sales data influence investor perception and currency valuation. Strong economic performance tends to boost a currency's value as it attracts foreign capital seeking good returns, while weaker performance can diminish currency value​.
2. Market Speculation: Traders and investors speculating on the future direction of a currency can cause its value to rise or fall. If traders believe a currency will strengthen in the future, they will buy more of it, increasing its value. Conversely, selling off a currency due to anticipated weakening will decrease its value. This speculative activity is a major driver of currency fluctuations, often based on economic forecasts and political events​.
3. Geopolitical Stability: The political environment in a country can affect its currency's stability. Nations with stable governments and low risk of political turmoil are more attractive to foreign investors. In contrast, countries experiencing political unrest or governance issues often see their currencies depreciate due to increased risk factors. Political decisions, elections, and international disputes can all trigger significant movements in the Forex market​.

What Are the Types of Exchange Rates?

There are two primary types of exchange rates used in the global financial markets: flexible and fixed.

Flexible Exchange Rates:

These are determined by the forces of supply and demand in the foreign exchange market.

Also known as floating exchange rates, they can change freely and are often influenced by events like changes in interest rates, economic data, and geopolitical stability.

Because they adjust based on market conditions, flexible rates can lead to more variability in the amount of money received in a transfer.

This means that if you're sending money abroad, the amount the recipient receives can vary widely depending on the current market rate.

Fixed Exchange Rates:

Under this system, a currency's value is pegged to another major currency, like the U.S. dollar, or to a basket of currencies.

This rate is usually maintained by a country's central bank which will intervene in the foreign exchange market to stabilize or adjust the currency's value against its peg.

Fixed exchange rates provide greater stability in international prices and are particularly beneficial for countries with less powerful economies that want to avoid wide fluctuations in their exchange rates.

However, they require large reserves of foreign currencies to maintain the peg, especially in an adverse economic environment​.

Impact on Money Transfers:

The type of exchange rate affects how much money is received in a transfer.

With flexible rates, the amount can fluctuate until the transaction is actually processed. With fixed rates, the amount remains predictable unless the peg itself is adjusted, which tends to happen less frequently.

Therefore, understanding which type of rate applies can help in planning and optimising international money transfers.

Calculating Exchange Rates

Calculating exchange rates manually is a straightforward process that requires a few basic steps.

Here’s how you can determine how much foreign currency you will receive or need during an international money transfer:

1. Identify the Current Exchange Rate: First, find the current exchange rate for the currency pair you are interested in. For instance, if you want to convert British Pounds (GBP) to US Dollars (USD), you might find a rate like 1.35, which means one British Pound is equivalent to 1.35 US Dollars.
2. Multiply by the Amount to be Converted: Use the exchange rate to calculate the equivalent amount in the foreign currency. For example, if you are sending £500 to the USA, you multiply 500 by the exchange rate: £500 x 1.35 = $675. This means you will send $675​.

Practical Examples:

• From GBP to USD: You have £500, and the current GBP/USD exchange rate is 1.35. Calculation: £500 x 1.35 = $675.
• From USD to GBP: You want to buy a product priced at £200, and the current GBP/USD exchange rate is 1.35. To find out how much you’ll pay in US dollars, you multiply the price in GBP by the exchange rate: £200 x 1.35 = $270​.

Understanding Direct and Indirect Quotations:

• Direct Quotation: This is when the foreign currency is a fixed unit and the domestic currency varies. For example, in the UK, a direct quote for USD might be 1.35 GBP/USD, meaning each US dollar costs 1.35 British Pounds.
• Indirect Quotation: This occurs when the domestic currency is a fixed unit and the foreign currency varies. An example would be 0.74 USD/GBP, indicating that each British Pound is worth 0.74 US Dollars.

Implications on Calculations:

• With direct quotations, the calculation is straightforward as you multiply the amount you have in your currency by the rate to get the foreign currency amount.
• With indirect quotations, you need to divide the amount by the rate. For instance, if you have £500 and the USD/GBP rate is 0.74, you calculate the dollar amount by dividing: £500 ÷ 0.74 = approximately $676.

What Tools Are Available for Calculating Exchange Rates?

Online currency converters and exchange rate calculators are indispensable tools for anyone involved in international transactions.

These digital tools provide real-time exchange rate data, helping users determine how much foreign currency they can obtain for their money or how much they need to send to meet a specific amount in another currency.

Using Online Currency Converters and Exchange Rate Calculators:

1. Access the Tool: Start by accessing a reliable online currency converter or exchange rate calculator. Websites like XE.com offer user-friendly platforms where current rates are readily available​.
2. Enter the Currencies: Select the currencies you wish to exchange. For example, if you need to convert GBP to USD, select GBP as your 'from' currency and USD as your 'to' currency.
3. Input the Amount: Type in the amount you wish to convert. The tool will automatically apply the current exchange rate to calculate how much of the foreign currency you will receive.
4. View the Results: The converted amount will be displayed. This reflects the current market rate, which is continually updated.

Effective Use of These Tools:

• Check for Updates: Ensure the tool you are using updates its exchange rates frequently to reflect real-time market conditions. This accuracy is crucial for financial planning and transaction execution.
• Use Multiple Tools: Compare results from different converters to ensure consistency and reliability of the data provided.
• Consider Fees and Margins: Be aware that the actual rate offered by money transfer services or banks may include fees or margins. The rate calculated by online tools should be used as a guideline rather than the exact amount you will receive.

Our Currency Comparison Tool:

‍Our website features a currency comparison tool that allows users to compare exchange rates and fees from various providers.

This tool helps you find the best deal by highlighting differences in rates and costs associated with different money transfer services.

It's an excellent resource for ensuring you get the most value out of your international transactions.

‍

Understanding Exchange Rate Spreads

Definition and Impact on Currency Conversion:

‍Exchange rate spreads are the difference between the buy (bid) and sell (ask) prices of a currency.

This spread represents the transaction cost, not included in the actual exchange rate, that financial institutions or currency exchange services charge when converting one currency to another.

Contribution to Cost of Sending Money Abroad:

‍Spreads can significantly impact the overall cost of sending money abroad.

A wider spread means a higher cost to the sender or recipient, as the provider earns more from the difference between what currencies are bought and sold for.

Setting Spreads by Providers:

‍Different providers set their spreads based on factors such as market volatility, the currency pair involved, and competitive pressures.

Banks typically have higher spreads due to operational costs, whereas online transfer services might offer narrower spreads as a competitive advantage to attract more customers.

Comparing Banks and Digital Providers

Overview of Banks:

‍Banks traditionally handle exchange rates for international transfers with a more conservative approach. They often offer less favorable exchange rates compared to market rates and might include higher fees, partly due to their substantial overhead costs.

Digital Providers (Non-bank):

‍Digital providers, or non-bank financial institutions, typically offer more competitive exchange rates and lower fees. They leverage technology to reduce operational costs, passing these savings on to customers in the form of better rates.

Comparative Analysis:

• Fees: Banks generally impose higher fees for international transfers compared to digital providers.
• Speed of Transfer: Digital providers often process transfers faster than banks, which can take several days.
• Exchange Rate Advantages: Digital providers are usually closer to the mid-market rate, offering more value for the same money transferred compared to banks.

Understanding these differences can help individuals and businesses make more informed decisions when choosing between banks and digital providers for their international money transfers.

‍

How To Secure the Best Exchange Rates?

Securing the best exchange rates and minimising fees are crucial for optimising money transfers when sending money abroad.

Here are some effective strategies:

Securing the Best Exchange Rates:

1. Monitor Exchange Rates: Keep an eye on fluctuations in the exchange rates leading up to your transaction. This monitoring can help you capitalize on favorable shifts in the rates.
2. Time Your Transfers: Aim to execute your transfer when economic forecasts or trends suggest strengthening in your favor. Timing can significantly impact the value you receive due to rate changes.
3. Use Rate Alerts: Many providers offer rate alerts, which notify you when exchange rates hit specified levels, ensuring you don’t miss optimal rates for your transfer​.

Understanding Bid, Ask Prices, and the Mid-Market Rate:

• Bid and Ask Prices: The 'bid' price is what buyers are willing to pay for a currency, and the 'ask' price is what sellers are willing to accept. The difference between these prices is known as the 'spread.'
• Mid-Market Rate: This rate is the midpoint between the bid and ask prices and represents the most real rate of exchange available. It's crucial to compare the offered rate against the mid-market rate to ensure you're getting a fair deal. Understanding these rates helps in identifying the best possible rates for currency exchange​.

Comparison of Fees and Service Charges:

• Shop Around: Compare the fees and service charges imposed by different money transfer providers. These can vary widely and significantly affect the total cost of your transfer.
• Read the Fine Print: Be aware of hidden charges such as transfer fees, receiving fees, or fees embedded within the exchange rate. Some providers offer a low upfront fee but compensate with a less favorable exchange rate.
• Choose the Right Transfer Type: Depending on the amount and urgency, the type of transfer (e.g., online, through a bank, or using a money transfer provider) can also impact the cost. Each method has different fees associated with it, so choosing the most cost-effective method according to your needs is crucial.

A Real-World Example

Understanding how exchange rate fluctuations can impact money transfers is crucial.

Here are scenario-based examples to illustrate this and ensure that you get the best exchange rate possible.

A customer intends to transfer GBP 100,000 to EURO. The current mid-market rate translates GBP 100,000 to EUR 116,489.27 as per Google. We compare quotes from two providers: Wise and Barclays Bank.

‍

Exchange Rate Comparison:

We can access real-time quotes from both providers online via their respective websites.

• Wise's Quote: EUR 116,169.71
• Barclays' Quote: EUR 111,510

‍

‍

We can see there is a significant savings by using Wise compared with using Barclays.

• Mid-Market Rate: EUR 116,489.27
• Wise: Offers a rate closer to the mid-market, subtracting EUR 319.56 from the mid-market amount.
• Barclays: Their rate is significantly lower, offering EUR 4,979.27 less than the mid-market rate.

While Wise is suitable for transfers under £5,000, for larger amounts like £100,000, it's advisable to consult a specialist currency broker who offers personalized phone support.

This approach enables you to get competitive bids from several trusted brokers, ensuring you secure the very best possible deal for your transaction.