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 >>
Related Articles
  1. Trading

    How to 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. Trading

    How Are International Exchange Rates Set?

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

    Your 9-Point Checklist for Selecting an Online Bank

    When selecting the right online bank for you, rates are not the most important factor.
  7. 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.
  8. Managing Wealth

    Top Tips For Exchanging Money

    Take these tips to heart to avoid wasting money when you exchange currencies.
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. International Currency Converter

    An electronic program that allows for the quick conversion of ...
  4. Online Currency Exchange

    An online system for exchanging one country's currency for another. ...
  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. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center