Currency exchange rates would seem like a complex subject for most people. However, in reality, it is something one can learn easily. Anyone travelling abroad should have a basic understanding of currency exchange rates and its determinants.
There are several foreign exchange options to cater to the varying needs of expats. Travel cards, foreign cash, Inward Telegraphic Transfer (ITT) are some of the common products offered by exchange service providers.
Exchange rates
Understanding exchange rates will help you:
- Find the exact exchange rate as required
- Undertake currency conversion by using the exchange rates to get good value for your money
Components of the exchange rate
Three main factors determine the exchange rates are:
- The currency
- Nature of the transaction–buy or sell
- Product purchased – currency, travel card or bank transfer
Currency
The exchange rate mainly depends on the currency you wish to buy/sell. Once you are clear on the currency you need, all you have to do is to check the rates of that currency against the AUD. For instance, to prepare for your travel to the UK, you must exchange your currency to GBP.
Type of transaction
In the above case, you know you the currency you are dealing with is GBP. Again, the exchange rate depends on the transaction–that is whether you are buying GBP or selling it.
The exchange rates differ slightly depending on the transaction type and across the currencies. It means that if you are buying GBP the rates offered will differ from what you’ll get if you are selling it.
Check the following chart to see the difference in the buying and selling prices of AUD to GBP and GBP to AUD during the past three months.
Figure 1- 3-month conversion rates of AUD to GBP
Figure 2 – 3-month conversion rates of AUD to GBP
Product you need
Another factor that determines the exchange rate is the product you wish to buy. Exchange rates differ according to the product chosen. Although cash could be the cheapest option, it is risky to carry a large amount of cash while travelling overseas. Travel cards might be hassle-free but comes with higher costs. Likewise, it is impractical to opt for online transfers for each and everything. So, a wise solution would be to go for a combination of all.
Calculating the Exchange Rates
There are some formulas to find exchange rates while converting currencies.
How much foreign currency can my money buy?
Use the following formula to calculate how much foreign currency you will receive in exchange of AUD:
AUD with you*exchange rate = Currency You Will Receive
For example, if you have 1,000AUD and you wish to buy GBP, while the exchange rate is 0.5580 then the amount of GBP you will receive is 558.0 (1000*0.5580 = 558.0)
How much would it cost you to convert AUD to GBP?
If you know the exact requirement of GBP you require, you can find the cost to convert AUD to GBP by using the following formula:
AUD required = Amount of pound you need/exchange rate
For purchasing 1,000GBP while the exchange rate is 0.5530, the amount of AUD you’ll have to pay is 1808.32AUD (1000/0.5530 = 1808.32).
What is the cost to send currency overseas?
If you wish to send a fixed amount of GBP aboard, the calculation is same as buying travel money.
The formula for calculation would be:
AUD required = Amount of GBP you need/exchange rate
Calculating the value of currency while converting GBP to AUD
You can use the formula below to calculate how much money you will receive while converting GBP to AUD:
Amount of GBP received/exchange rate = AUD received
If you received 2,000 GBP through bank transfer while the exchange rate was 0.5530, you’ll receive 3,616.64 (2,000/0.5530 = 3,616.64).
Are there any hidden/additional costs?
Generally, currency exchange attracts some costs. If you exchange through your bank, they might offer you attractive rates according to the account you hold. If you choose other providers, you can expect a minimum transfer or exchange fee.
Which is the best place for currency conversion?
It is always advisable to compare the exchange rates offered by various exchange houses before you convert your money. Often, travellers exchange currency at the airport. This could be costlier as the exchange rate offered could be less competitive. It is always better to exchange the currency at a bank in your town or at other exchange service providers in your area after checking the rates.
Is there a limit to the amount of money you can convert?
Although there is no limit to the amount of currency you can bring in or out of Australia, you have to declare amounts of $10,000 or its foreign equivalent.