If you often switch between two or more currencies, you'll know that calculating an exchange rate isn’t always straightforward.
Check out this easy guide to calculating exchange rates to make sure you’re not ripped off when you swap your currencies.
The good thing about Wise that you don’t need to calculate exchange rates, markups and all that jazz. You’ll always get the mid-market rate and pay just a small fee – but more on this later.
How to find a market exchange rate
You can find the market exchange rate as easily as searching on Google, but first, you need to know what to look for.
The exchange rate for a currency, such as US dollars, will always be expressed as a currency pair.
This is because in order to purchase one currency, you need to trade it for another.
For example, if you’re using US dollars (which is expressed using the currency code ‘USD’) to buy Euros (EUR), the currency pair is EUR/USD. The exchange rate you see is based on the value of the currencies in relation to one another. This applies to any currency you're exchanging.
To find the market exchange rate, you can simply search for a currency pair on Google – for example, EUR/USD. You can also find the exchange rate by visiting your bank, or if you're traveling, you’ll often find exchange rates displayed at airports and local banks.
Online alternatives like forex platforms also offer on-demand currency conversions.
How to read an exchange rate
As mentioned, an exchange rate is expressed as a currency pair, for example, USD/GBP – GBP is the abbreviation of British Pound Sterling. The first currency that's listed in the pair (USD) always represents one unit of that currency, meaning 1 USD. The exchange rate tells you how much of the second currency (GBP), you would need to purchase one unit of the first currency.
This means that if the USD/GBP exchange rate is 0.80, it will cost 0.80 GBP to purchase 1 USD.
How to calculate an exchange rate?
Let’s start with a simple example. Maybe you’re a British pensioner who lives in Spain but earns a £400 monthly pension from the UK. Searching online, the exchange rate would look like this:
1 GBP = 1.19 EUR
That would mean 1 British Pound Sterling buys 1.19 Euros. Since your monthly pension is £400, you’d calculate it like this:
£400 x €1.19 = €476
So, a £400 pension here would equal €476.
On the other hand, perhaps you have a rental in Spain and need to pay exactly €500 per month. How many British Pounds would you need, then?
In this case, the exchange rate would be written the opposite way around, like this:
1 EUR = 0.84 GBP
To find the Sterling cost of €500, you just need to repeat the earlier calculation:
€500 x £0.84 = £420.
Here, to pay a €500 rent, you’d need £420.
Though understanding how to calculate exchange rates may be clear enough, banks and money transfer services are known for offering exchange rates that deviate significantly from the actual market rate, so it's important to know what to look out for.
What are conversion spreads?
When you’re exchanging money, you’re unlikely to receive the same rate you find online because of currency conversion spreads.
A conversion spread is the markup that exchange services such as PayPal charge on top of the exchange rate in order to make a profit.
The rate you're offered will vary from bank-to-bank and service-to-service, depending on a variety of factors, including how much you're exchanging, which currencies you're using, and whether you're changing money online or in-person.
To calculate the markup, you can compare the exchange rate offered by the service you’re using with the exchange rate you find on Google.
Now, we'll show you the steps you need to follow to calculate mark-ups.
Step 1 - Find the market’s exchange rate
You’ll first need to find the rate for the currency pair you’re working with.
Taking our earlier example, let’s say your pair is GBP/EUR and the exchange rate is 1.19, so 1 Pound Sterling will buy you 1.19 Euros.
Step 2 - Find the exchange rate your bank is offering you
Because banks take a cut, you'll almost always get a different exchange rate than the rate you find online.
In our example, the exchange rate for GBP/EUR was 1.19, but let’s say the rate your bank offers is 1.13.
Step 3 - Divide the two exchange rates to find the percent of markup
To calculate the markup, you'll need to work out the difference between the two rates and then translate this into a percentage.
Here, the difference between the real rate and your bank’s rate is:
1.19 - 1.13 = 0.06
To turn this into a percentage, you’ll divide it by the original exchange rate and then multiply by 100:
0.06 ÷ 1.19 = 0.05042017 x 100 = 5.04%
In this example, your bank is charging a 5.04% markup to convert your money for you (assuming there aren't any additional fees). By calculating the percentage for each currency exchange service you are researching, you can then easily compare.
Avoid high currency conversion fees with Wise
If you want to avoid being ripped off, Wise offers a no-fuss approach to currency exchange. You’ll always be charged the standard mid-market rate, with no markups, and low, transparent fees. It takes just minutes to create a new account, but it’s 6x cheaper than a regular bank.
See how much you can save with Wise today:
Bottom line
Understanding how to find, read and calculate exchange rates is the best way to avoid unnecessarily high fees and to get the best value for your money.
There are lots of services available to exchange money, from traditional banks to money transfer providers like Wise, and being aware of your options will help you get the best available rate on the market.
*Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information. This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional. We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
