Monday, 21 August 2023, 4 minute read
To get the best value for money from your international transactions, it’s important to understand how exchange rates work. But with foreign exchange (FX) rates changing every hour, it can be hard to know where to begin when it comes to working out exchange rates.
In today’s article, we'll walk you through how exchange rates work, how to calculate them and the best way to avoid being overcharged for international payments.
Going forward, you’ll have the knowledge you need to make confident currency conversions, you’ll know where to look to double-check them - and you’ll never be overcharged by your bank again!
What is an exchange rate?
An exchange rate is basically the value of one country's money compared to another country's money. It tells you how much one unit of money from one country is worth when converted to the currency of another country.
Exchange rates can change significantly from day to day (and even hour to hour) for a whole host of different reasons, such as world events, interest rates and how people feel about the market. This can make it very hard for people and businesses to predict when they will get the best rates.
Here are a few of the key factors that impact exchange rates each day:
Interest rates: If a country has higher interest rates, it often attracts more investments from other countries. This can lead to its money becoming more valuable.
The strength of a country’s economy: When a country's economy is doing well, with low unemployment and increased production, its currency can get stronger.
Stable politics: Countries with steady and predictable politics usually have stable exchange rates, which attract foreign investors.
Market mood: How people feel about the market and what they think will happen can make exchange rates change quickly.
Trade balances: If a country exports more than it imports, its money might become more valuable due to higher demand.
Why should you work out an exchange rate before converting currencies or sending money abroad?
It’s important to know how to calculate or find out accurate exchange rates so that you can get the best rates when sending money abroad or converting your money into a foreign currency.
For example, if you're planning a trip to Europe and you're from the United Kingdom, knowing the pound to euro exchange rate is key for managing your spending. And if you’re a business making a payment to an international supplier, you want to make sure you get the best, lowest rates when paying them - and be able to check that your bank or payment platform isn’t hiking up the exchange rates artificially.
Now that you know why knowing a currency exchange rate matters, here’s how to work an exchange rate out:
How to calculate an exchange rate
Understanding exchange rates involves a bit of simple maths. The basic formula for figuring out an exchange rate looks like this:
The exchange rate = your starting currency amount ÷ the target currency amount
So, let's say you want to know the pound to euro exchange rate; the exchange rate for turning British Pounds (GBP) into Euros (EUR). The formula becomes:
The exchange rate (GBP to EUR) = the amount in GBP ÷ the amount in EUR
Check your results with an exchange rate calculator
As we’ve just touched on, the maths behind working out foreign exchange rates is fairly straightforward.
But while you can do the maths yourself, things get trickier when you're dealing with lots of currencies and rates that change all the time. This is where an exchange rate calculator can be really helpful.
Crezco's exchange rate calculator, for instance, lets you quickly and easily determine the value of different currencies, and gives you accurate exchange rates in real-time. Just enter the amount of money you want to convert (or the amount you’ll be converting into) into the calculator and you’ll get an exact result.
Read more: How to manage currency risk?
Working out historical exchange rates
If you want to know what exchange rate was used in a past transaction (rather than the current exchange rate), you can use this simple formula:
The historical exchange rate = the amount in your target currency ÷ the amount in your starting currency
This will help you figure out the exchange rate that was used for a specific transaction in the past. Also, many banks and financial websites have information about historical exchange rates that you can read up on.
How to send money abroad without higher-than-necessary exchange rates
It’s important to be aware that when you go to the bank to convert currencies, you most likely won't get the market price that traders get. The bank or currency exchange house will hike up the price so they make a profit. Credit cards and payment service providers like PayPal will also do this when converting currencies.
Read more: The best global payment gateways
Crezco can help
Crezco is an open banking payment platform that lets you make and collect international payments quickly, securely and affordably. Crezco ensures you get the most competitive rates when making international payments, and helps you avoid any extra charges or hidden fees.
However, when you use Crezco’s international account-to-account payment solution, you can benefit from competitive rates without worrying about any hidden fees. You can make frictionless payments to 180 countries, with our platform currently supporting 37 currencies.
Read more: How to send money overseas
On top of this, you can be confident that your payment will be made quickly and securely, with minimal effort required on your part.
Crezco will provide both you and the supplier with complete transparency, as both you and the supplier will get live updates when payments leave your account and arrive in theirs. You’ll also benefit from Crezco’s use of open banking and award-winning proprietary risk tools, which keep your international payments safe and secure.
Read more: How to pay an international invoice?
You’re ready to start working out exchange rates
Understanding exchange rates is an essential skill for anyone dealing with sending money abroad or converting currencies, whether it's for business or personal use. When you know the basic formula and use a trustworthy exchange rate calculator, you'll find currency conversions a breeze.
Keep in mind that exchange rates dance to the tune of various factors, so staying updated on the economy and world events will help you time your payments and currency conversions better.
Whether you're gearing up for a trip, growing your business across borders or making payments to a foreign supplier, learning about exchange rates will definitely pay off.