Converting between Several Currencies

Fundamentals of Currency Conversion

Currency conversion is the process of changing the value of one currency to another, taking into account the current exchange rates.
An exchange rate is the rate at which one currency can be exchanged for another. This rate fluctuates based on various economic factors.
In dealing with currencies, you are likely to come across the terms ‘base’ and ‘counter’ currencies. The base currency is the one you are converting from, while the counter currency is the one you are converting to. For example, in the exchange rate GBP/USD, GBP is the base and USD is the counter.

To convert from one currency to another, we multiply the amount we have in the base currency by the exchange rate. For instance, if you’re converting £100 to USD with an exchange rate of 1.30, you will have $130.
When converting from one foreign currency to another, it could involve two steps. For example, to find out how many euros (EUR) you can get for your Japanese yen (JPY), you may need to convert your JPY to a ‘common’ currency like the British pound (GBP) first, and then convert the GBP to EUR.

Be careful with inverse exchange rates. For instance, if we know GBP/USD, we can find USD/GBP by taking the reciprocal of the first exchange rate.
Remember that exchange rates fluctuate. The rate you use today might not be accurate tomorrow. It’s important to always check the most recent rates.
When calculating several currency conversions, it’s advisable to keep the intermediate steps in a currency conversion to avoid rounding errors. Round just the final answer to the appropriate number of decimal places.
Keep in mind that most exchange rates are quoted to four decimal places, except for rates involving the Japanese yen, which are quoted to two decimal places.
Pay attention to transaction costs or commission fees. Converting currencies often incurs a small fee, which should be considered when planning financial transactions in foreign countries or investments in foreign assets.

Understanding currency conversion is important for various real-life financial transactions. For instance, it is needed when buying goods from foreign countries, travelling overseas, or investing in foreign stock markets.
The ability to convert between several currencies also forms part of financial literacy, which entails the ability to use various financial skills such as planning, budgeting, and investing to manage one’s financial resources effectively.