A:

Currency can be converted using an online currency exchange or it can be converted manually. To use either method, you must first look up the exchange rate using an online exchange rate calculator or by contacting your bank. Be aware that the rates charged by your bank may differ from those you see online because banks earn small profits on exchanges, whereas online rates are the same as those quoted between banks.

In addition, it is important to note that the exchange rate you get when trading one currency against another probably will differ from the rate you will obtain during the actual conversion of one currency into another at a local bank. Traders can access the tight bid-ask spreads that are posted by banks amongst each other, but visitors to foreign countries who require local currency will pay slightly higher prices for the same currency. For example, an online EUR/USD (euro against the dollar) may appear as 1.5560 - 1.5563, which means banks are selling to each other at 1.5563, but are buying from each other at 1.5560. The spread (or difference) of three pips (points) is the profit banks realize for facilitating this transaction.

Let's conduct a dollar-to-euro conversion, for example. First, look up the exchange rate online, which will be quoted as the amount $1 can buy in euros or as the amount one euro will buy in dollars. If $1 buys 0.6250 euros, then $10,000 would equal 6,250 euros (because 10,000 x 0.6250 = 6,250). If the quote states that one euro buys $1.60, then $10,000 still would equal 6,250 euros (because 10,000/1.6000 = 6,250).

(For more on this topic, see The Impact of Currency Conversions.)

RELATED FAQS
  1. How do I find out my bank's bid-ask spread for currency conversions?

    Learn how to find your bank's bid-ask spreads for currency conversions, and understand why you should consider alternative ... Read Answer >>
  2. Why do forex traders use a currency converter?

    All currencies are quoted in pairs - one country's currency against another country's currency. A currency converter is used ... Read Answer >>
  3. How does online banking assist with budgeting?

    Setting up online banking can make a personal budget easier to manage through the use of multiple accounts or expense categories ... Read Answer >>
  4. What Are the Pros and Cons of Online Checking Accounts?

    Learn about the ways an online checking account can save you time and money, but understand the drawbacks before signing ... Read Answer >>
  5. What is the value of one pip and why are they different between currency pairs?

    In forex markets, currency trading is done on some of the world's most powerful currencies. The major currencies traded are ... Read Answer >>
Related Articles
  1. Trading

    Here's How You Calculate An Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  2. Personal Finance

    The Worst Place to Exchange Currency

    Exchanging currency is a necessary part of traveling, but not all currency exchanges are created equal.
  3. Managing Wealth

    Top Tips For Exchanging Money

    Take these tips to heart to avoid wasting money when you exchange currencies.
  4. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  5. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  6. Retirement

    Are Do-it-Yourself Online Wills Right for You?

    An online will site can be an inexpensive and fast way to get that all-important will completed. Find out if this is the right solution for your situation.
  7. Trading

    Traveling Abroad? Get the Best Exchange Rates

    When you exchange currencies, here’s how to make sure you are getting top value on the trade.
  8. Investing

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  9. Personal Finance

    Best Ways to Exchange Currency

    How to avoid fees and get the best deal for your dollar.
RELATED TERMS
  1. Universal Currency Converter

    A program that allows for the quick conversion of currencies ...
  2. Conversion Rate

    The ratio at which one currency can be exchanged for another. ...
  3. Online Currency Exchange

    An online system for exchanging one country's currency for another. ...
  4. International Currency Converter

    An electronic program that allows for the quick conversion of ...
  5. Electronic Currency Trading

    A method of trading currencies through an online brokerage account. ...
  6. International Currency Exchange Rate

    The rate at which two currencies in the market can be exchanged. ...
Hot Definitions
  1. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  2. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  3. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center