Calculating FX rates: Here’s the easiest way
Calculating foreign exchange (FX) rates is an inevitable part of paying international contractors, suppliers, clients, and employees. But determining the relative value of one currency versus another isn’t the easiest task.
Here, we’ll take a look at how you can easily read and calculate an FX rate using a simple formula. You can rely on it to study your market and make exchanges at the ideal time wherever you are in the world.
Calculating an FX rate: What are the challenges?
The first thing you need to understand is that FX rates constantly change. The rate you see in the morning might be completely different than the one you see midday. This is because the market rises and falls throughout the day based on demand levels.
This is challenging for many business owners because there’s often no way to predict when you’ll get the best rates. You usually need to hire someone who is highly specialized in this area to guide you with your decisions.
Another challenge is that different providers will display different rates. Depending on whether you’re using an FX provider or bank, suppliers typically won’t allow you to access true rates. This is because they’re looking to profit off of markups and fees attached to the true rate, which altogether is the rate you’re offered.
How to find and read FX rates
Several financial tools exist to help you read true market FX rates. Some of these include the following:
Money exchange websites
Money service providers
Big bank websites
Forex trading apps
Fintech money transfer platforms
When you start reading true FX rates, you want to determine what your current local currency is worth in another currency. For example, 1 US dollar (USD) is worth 1.29 Canadian dollars (CAD) — give or take a number of cents, depending on the time of day and market conditions.
So, essentially the USD is more valuable in Canada after it’s been converted to CAD, while CAD converted to USD depreciates in value.
Calculating an FX rate: The formula
Calculate an FX rate using this simple formula:
Your starting figure (in your local currency) divided by the final number (in the new foreign currency) = the exchange rate
For example, let’s say you have 1,000 USD, and you want to exchange it for CAD. Once converted, you’ll receive 1,289.69 CAD.
Using the formula above, you can find the exchange rate: 1,000 / 1,289.69 = .775 (~.78).
As you can see, the exchange rate is about 0.78 USD to 1 CAD. But to better understand the exchange rate, you can divide your local currency figure (1,000 USD) by the FX rate, which should give you about the same number in CAD (1,289.69 CAD).
Let’s say you want to buy a new computer for your international office that costs 845 CAD, but your USD budget is 600. You can divide your USD by the exchange rate of .78, and you’ll get 769 CAD.
So, you’ll see that this new computer is within your budget of 845 CAD!
[Related: How to set up business operations in Canada]
How are FX rates determined?
FX rates typically follow a floating regime, which means they aren’t set. The market’s current supply and demand determine them.
Fluctuations in FX rates are the result of changes in local interest rates, international competition, and the general landscape of different global economies. Luckily, fluctuations between USD and CAD aren’t as frequent or volatile as those between other foreign currencies.
How does inflation affect the FX rate between two countries?
Inflation is closely related to FX rates and therefore has a significant impact on them.
A reduction in an exchange rate often leads to inflation. So, if your local currency decreases in value, the cost of imported goods and services will likely increase. This drives up local prices, which causes inflation.
However, high inflation isn’t always an immediate concern because there’s usually a lag period between exchange rate fluctuations. The economy won’t feel its impact until a bit later.
The bottom line: What you should consider
Understanding exchange rates will help your business save money in both the short term and long term, so it’s wise to find as much information as possible. You’ll be able to identify areas to reduce your international spending and avoid inflated FX rates.
To ensure you’re in the know about current exchange rates between different countries, you can rely on some helpful tools.
Our Global Business Accounts have an exchange engine that allows you to instantly transfer money without physically going into a bank or using other difficult-to-manage money exchange channels. And the best part is that you don’t have to calculate your own rates — we’ll take care of that for you.
Direct access to interbank exchange rates means you get the best FX rate possible, so you can start saving money now. You also don’t have to worry about conversion fees with Airwallex — only a small margin of 0.3% to 0.6% above the interbank exchange rate.
If you’re ready to make the most of your money, sign up with Airwallex today.