# How to Calculate an Exchange Rate

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## Check How to Calculate an Exchange Rate

Formulas and functions are used to organize numbers and data in Microsoft spreadsheet software. Businesses of all sizes use Excel analysis to conduct financial analysis around the world. A live currency converter based on MS Excel is a simple and easy to use tool to convert currency from one exchange to another. There is no need to install any additional software or visit a website. Excel downloads currency data from a forex website (or any other website you’ll use to build the tool) and updates it at predetermined intervals.

## How to calculate an exchange rate

### Find market exchange rates

Traders and institutions buy and sell currencies 24 hours a day during the week. For a trade to occur, one currency must be exchanged for another. To buy British Pounds (GBP), another currency must be used to buy it. Whichever currency is used will create a currency pair. If US dollars (USD) are used to buy GBP, the exchange rate is for the GBP/USD pair. Access to these forex markets can be found through any of the major forex brokers.

If the USD/CAD currency pair is 1.33, that means it costs 1.33 Canadian dollars for 1 US dollar. In USD/CAD, the first currency in the list (USD) always represents one unit of that currency; the exchange rate shows how much of the second currency (CAD) is needed to buy that unit of the first (USD). This rate tells you how much it costs to buy one US dollar using Canadian dollars. To find out how much it costs to buy a Canadian dollar using US dollars, use the following formula: 1/exchange rate.

In this case, 1/1.33 = 0.7518. It costs US\$0.7518 to buy one Canadian dollar. This price would be reflected by the CAD/USD pair; notice that the position of the coins has changed. Some of the most popular currencies that trade against the dollar are the euro (EUR/USD), the Japanese yen (USD/JPY), the British pound (GBP/USD), the Swiss franc (USD/CHF), the Australian dollar . (USD/AUD), the New Zealand dollar (USD/NZD), and the Canadian dollar (USD/CAD).1 Incidentally, the order in each set of parentheses reflects the usual direct quoting scheme for each combination.

### Conversion margins

When you go to the bank to convert currencies, you will most likely not get the market price that the dealers get. The bank or currency exchange will increase the price to make a profit, as will credit cards and payment service providers like PayPal, when a currency conversion occurs. If the USD/CAD price is 1.33, the market says that it costs 1.33 Canadian dollars to buy 1 US dollar. However, at the bank it can cost 1.37 Canadian dollars. The difference between the market exchange rate and the exchange rate they charge is your profit. To calculate the percentage discrepancy, take the difference between the two exchange rates and divide it by the market exchange rate: 1.37 – 1.33 = 0.04/1.33 = 0.03. Multiply by 100 to get the percentage markup:

0.03 x 100 = 3%. There will also be a surcharge if US dollars are converted to Canadian dollars. If the CAD/USD exchange rate is 0.75 (see previous section), then the bank can charge 0.7725. They are charging you more US dollars than the market rate. 0.7725 – 0.75 = 0.0225/0.75 = 0.03 x 100 = 3% markup. Banks and exchange houses are compensated for this service. The bank gives you cash, while the traders in the market do not deal in cash. In order to obtain cash, transfer fees and processing or withdrawal fees would apply to a forex account in case the investor needs the money physically. For most people looking to convert currencies, getting cash instantly and with no fees, but paying a premium, is a worthwhile commitment. Look for an exchange rate closer to the market exchange rate; can save you money. Some banks have alliances of ATM networks around the world, offering customers a more favorable exchange rate when withdrawing funds from partner banks.

Do you need a foreign currency? Use exchange rates to determine how much foreign currency you want and how much of your local currency you’ll need to buy it. If you’re heading to Europe, you’ll need Euros (EUR) and you’ll need to check the EUR/USD exchange rate at your bank. The market rate may be 1,113, but an exchange may charge you 1,146 or more.

Suppose you have \$1,000 USD to buy euros. Divide \$1,000 by 1.146 (what a bank can charge) to get 872.60 euros. That’s how many euros you get for your \$1,000. Since euros are more expensive, we know we have to divide, so we end up with fewer EUR units than USD units. Now suppose you want 1,500 euros and you want to know how much it costs in USD. Multiply 1,500 by 1,146 to get \$1,719. Since we know that euros are more expensive, one euro will cost more than one US dollar, so we multiply in this case.

## Final words: How to Calculate an Exchange Rate

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