Currency Exchange Rates Can be Calculated by Two Different Ways

9 January 2012
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Currency exchange rates are the rates of one currency needed to purchase or sell the currency of another country. Every nation of the world has an official currency in which they conduct business. The international exchange rates are calculated on a daily basis, based on the results of foreign currency trading activity for the day.

Foreign exchange rates are calculated by two different ways: direct and indirect. A direct rate is also known as a multiplier in which a value of a currency in question is multiplied by the target currency or the quote currency to determine the value of the base currency. Now, for example, if you want to exchange British pound into dollars, first you need to get the direct exchange rate from a bank or financial services company which also provides currency exchange rates. This rate needs to be multiplied by the amount required in U.S. dollars. Now, the figure that comes after this multiplication is the amount of British pound that is required. The method to read direct exchange rate table is from left to right.

Another method to calculate international exchange rates is indirect which is also known as a divider. The daily posted rate is provided based on one specific currency, and all values are based on the valuation of a third currency. Therefore, the rate must be divided by the daily rate for the third currency to obtain the actual amount required in the home currency to purchase the secondary currency.

Currency rates are based on trading that is performed on foreign exchange market. Governments, banks, and large companies regularly keep other countries currencies as an investment. They buy and sell the currency based the latest information regarding economy, political stability, and economic forecasts of those respective countries.

Meanwhile, the rate which is used by traders for purchases and traveling is called the market rate. Market rate is always based on the trading completed the previous day. Market rate is simply a rate at which the currency was selling the previous day at the close of trading. However, this rate is only available when trading in currency. Most banks and financial companies add a percentage value to the rate, so that the consumer pays more.

When shopping for the best currency exchange rates, it is important that both the means and the timing of of the currency exchange transaction are right. Any one gets the best foreign exchange rates when currencies are exchanged in extremely high volume by financial institutions at a very high level. Anyone who is looking to exchange currency should attempt to do so as close to this level as possible. The exchange of currency is nothing but yet another market transaction that will happen under market conditions that weaken the currency being purchased and strengthen the currency being sold. Usually, large number of volume of currency exchange rates occurs at the banks and governments level. These are the organizations that exchange large volumes of currency every day and include no overhead. In many cases, the trick to obtain the best currency exchange is to do so through a bank or financial institution.

 

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Author: Peter lawlor is a forex market specialist and writes about currency exchange rates and how to get the best international exchange rates.

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