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. What is a currency converter and how do I use one?

    A currency converter is a calculator that converts the value or quantity of one currency into the relative values or quantities ... Read Answer >>
  3. 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 >>
  4. How is the forex spot rate calculated?

    The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies ... Read Answer >>
  5. 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 >>
  6. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... 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. 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.
  3. 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.
  4. Trading

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  5. 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.
  6. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  7. Trading

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  8. Personal Finance

    Best Ways to Exchange Currency

    How to avoid fees and get the best deal for your dollar.
  9. Personal Finance

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
RELATED TERMS
  1. Conversion Rate

    The ratio at which one currency can be exchanged for another. ...
  2. Universal Currency Converter

    A program that allows for the quick conversion of currencies ...
  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. Online Banking

    The performance of banking activities via the Internet. Online ...
  6. Currency Exchange

    A business that allows customers to exchange one currency for ...
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center