Before you start planning your next trip abroad, you should make sure you’ve got a good understanding of what exchange rates are, how they work, and how to calculate them. Learning how to work out currency exchange rates is an important thing to understand if you're planning on spending in any currency other than the pound.
Although banks and credit card companies will automatically work out the exchange rate for you, they don’t all come to the same conclusion, so to speak. So it’s good to be able to work it out for yourself so you can shop around for the best deals and spend your travel money wisely.
This blog will give you everything you need to know on what exchange rates are, how they work, and how to calculate exchange rates yourself.
What is an exchange rate?
An exchange rate is the rate at which one currency can be exchanged for another. For example, if the exchange rate between the pound and the US dollar is 1.26, then 1 pound can be exchanged for 1.26 US Dollars. Exchange rates fluctuate on a daily basis, so the amount that your currency is worth can be different at any given time.
When you’re converting your currency, you’ll want to find the best exchange rate so you can get the most out of your money. If you were planning a trip to the US, it would be better to convert your money to dollars when the exchange rate is at 1.30 instead of 1.26. This is because if you were trying to convert £100 when the rate is at 1.30, you would get $130, but if the rate is at 1.26, you would get $126.
How are exchange rates calculated?
The truth is, there are no ‘official’ exchange rates for any currency. Every day, banks and traders buy and sell currencies, and the exchange rates are essentially the prices that they’re willing to pay for different currencies.
The most ‘official’ rate is the mid-market rate, which is the midpoint of the buy and sell prices for two currencies. This is the rate you’ll see when you google an exchange rate. Unfortunately, it’s not always the rate that a bank or credit card provider will give you when you take out money or shop abroad. So even if they say they charge zero foreign transaction fees, the real fee might be hidden in the exchange rate.
There are a number of different factors that have an influence on exchange rates, including economic performance, inflation, interest rates, public debt, account deficits and trade.
How to calculate exchange rates yourself using a formula
Although it's easy to find out the current exchange rates for different currencies online, it’s more useful to know how much money something will actually cost in a different currency. For example, if you're out shopping on holiday in Europe, you’d want to quickly be able to work out what a €20 item would cost in pounds.
You can use the exchange rate to work out how much money you’ll have once it’s been converted into a foreign currency.
The formula for working this out is: the money you want to convert x the currency exchange rate = the money you’llin the foreign currency.
So if an item you want to buy is €20, you would multiply it by 0.8 (EUR/GDP exchange rate) to find out that it costs £16.
You can apply the same rule to taking out cash. In this case, taking out €100 should cost around £80.
Getting the most out of your holiday
Exchange rates fluctuate daily, so it’s a good idea to keep an eye out and try to find the best exchange rate to get the most out of your money. Always compare the exchange rate you’re getting to the rate you find on Google, Reuters, or another third-party source.
Shopping around for the best exchange rate is important for getting the most out of your holiday, whether you’re travelling on a low budget or not.
How HyperJar can help you get a better exchange rate
The HyperJar prepaid travel card is a perfect option for spending money abroad, because it will give you Mastercard’s best exchange rate on each purchase, with no fees on top. By travelling with a HyperJar card, you won’t be charged any fees for spending in a different currency, you won’t have to carry around too much cash, and you can spend directly from a holiday jar to make sure you’re staying within your budget.
With HyperJar partners TUI and hotels.com, you can make your holiday budget go even further, as every pound you commit to spending with them in future gets an annual growth rate of 4.8%. If you’re saving up for a trip next year and can put aside £500, by the time you’re ready to go on your trip you’ll have an extra £24 to spend.