Today I've had to learn what exchange rates are.
I've never really cared about them, not even when exchanging money before holiday and even then not really considered it much more than something to buy at a cost(which I'd not quibble at) - I'd just buy and go.
I know roughly what they are but I've never really considered them.
Today I considered them.
Specifically, what I wanted to know was what they actually mean not just that they are "how much of this gets me some of that", which is essentially what it means.
Currency Exchange rates are rates at which a currency exchange will convert from one currency to another.
For example converting from ZA currency to USD currency.
* The ZA to USD exchange rate is expressed as how many USD will it take to convert to 1 ZA (\(0.08)
* The USD to ZA exchange rate is expressed as how many ZA will it take to convert to 1 USD (R12.6)
Note: The the TO Currency is
- What the resulting rate is in. (ZA-US: \)rate) and (US-ZA: Rrate)
- How many TO currency units make up 1 FROM unit (GBP/US - how many USD make up a GBP)
* So the "Exchange rate" for ZA to USD (aka AZ-USD) is how many USD will it take to get to 1 ZA.
* So the exchange rate is very much centered around USD as its all about how many USDs will it take to get to 1 of the Target currency (ZA)
Thus as it will take 0.08 USD to get 1 ZA so that ZA-USD exchange rate is 0.08.
Exchange rates thus are usually reported and stored in the form of FROM_CURRENCY to US:
* EUR/US = \(1.18
* GBP/US = \)1.34
* ZA/US = $0.08
* US/EUR = E0.848
* US/GBP = £0.74
* US/ZA = R12.57
Cross Rates
So its now clear to me that exchange rates quotes are rates that are mostly in respects to USD such as GBP-USD meaning how many USD does it take to get 1 GBP which is: 1.34 (this is also the rate)
If you have two exchange rates stored in this way - rates respective to USD ie
- GBP/US (USDs to make up 1 GBP)
- EUR/US (USDs to make up 1 EUR)
- ZA/US (USDs to make up 1 ZA)
If you want to know the GBP/ZA ie the amount of ZAs that equates to 1 GBP and the above 3 exchange rates are available to you(IE that are all rates showing how many USDs it takes to get to the Target currency), you can calaculate two currencies this way:
* (GBP/US rate) / (ZA/US rate) = 1.34 / 12.57 = R rate = R16.84
If you want to get the exchange rate from one currency to another where both rates are not based on USD, you need to perform another step.
Summary
- Exchange rates are usually stored and quoted to show how many USD it takes to equate to the currency in question such ie EUR as EUR/US, YEN as YEN/US and GBP as GBP/US