A:

Currency can be converted using an online currency exchange or it can be performed manually. To use either method, you must first look up the exchange rate using an online exchange rate calculator or by contacting your bank. 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 receive 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, 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 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 using a website such as xe.com, 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.")

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