Planning a foreign trip? Or, looking for international investment? In either case, you need to keep an eye on foreign exchange rates. That’s critical for getting the best end of the deal.
What are exchange rates? How do they matter? Let’s answer your questions, one at a time. We’ll also be diving deep into how you can compute foreign money exchange both, automatically and manually. Read on, as this is your crash course on all things foreign exchange.
What are exchange rates?
Exchange rates are the cost involved in exchanging a currency for another one. Suppose you buy US Dollars with Indian Rupees. Here, the total Rupees you spend to buy a Dollar is the exchange rate. You can call it the value of a given currency with respect to another currency.Exchange rates are subject to the country’s economy and policy initiatives, the balance of payment, interest rates, inflation, FDI, and other key factors. That makes exchange rates a highly unstable commodity. As currencies actively change hands 24/7/365, the exchange rates rise and fall.
Since exchange rates fluctuate at all times, monitoring them becomes essential. If a currency is converted when its prices are low, you end up with low returns. That implies your buying power in an already more costly country is compromised. International investors are most affected, as the money involved is high. Even a minor difference in exchange rates adds up to hefty loses.
Types of exchange rates:
Exchange rates come in all shapes and sizes. Here’s your rundown:- Fixed-Rate: True to the name, they are fixed and hedge you against fluctuations. Herein, the currency derives its value when paired with a stable currency or asset.
- Floating Rates: The currency value is subject to demand and supply, and hence, changes rapidly. Central banks often sell or buy currencies to restrict extreme fluctuations.
- Forward Rate: The rates depend on a forward contract between two parties where the sale/purchase of currencies is stipulated at a given rate and at a given time in future.
- Spot Rate: Want to execute the currency conversion right now without much statistical analysis? Then the spot rate is what you get. It’s the currently applicable exchange rate.
- Dual Rate: As the name suggests, Dual exchange rates comprises two values for a given currency, one each for domestic transactions and foreign transactions.
Calculating exchange rates manually:
If you can do some simple math, seeking the help of an automated foreign currency converter is not required. Just follow the following steps and compute the exchange rates, the DIY-way.- Decide the total money you’ll need to carry with you to a foreign location.
- Search for the exchange rates of the currency you wish to purchase.
- Apply the formula, M = E X T, to get foreign exchange rates.
In this formula:
- M stands for the money you wish to convert.
- E denotes the applicable exchange rate.
- T is the total money you get post-conversion.
Calculating exchange rates via web tools:
Forex converter is a web tool designed to perform exchange rate calculations easily, quickly and accurately. You can find this software at Forex dealers, banks, and speciality websites.Foreign exchange converters are site-specific. However, the process is more or less the same.
- Access an exchange converter updated with the latest conversion rates.
- Choose currencies to be exchanged from the available options via a drop-down menu.
- Type in the amount you need to covert
- Select the commission rate, if a separate column for the same is provided.
- Press the Convert menu and your exchange rates will be instantly displayed.
