One of the most interesting economic lessons in life occurs when you travel internationally. Americans are so used to using the dollar they hardly realize that other countries have their own type of currency. Therefore, when you travel and stay somewhere other than the United States you have to use the money for that country. For example, in Britain it’s the pound and across Europe it’s the euro. When money is changed there is not always an ‘even-up’ scenario where one dollar is the same as an equal amount of the currency of the country of destination.
The cost of changing money from one country to another is called the exchange rate and these fluctuate constantly from day to day and week to week. That is because ‘exchange’ is traded on the open market and as a result the price of this currency can go up or down just like stocks or gold.
One quick lesson in exchange may occur when you cross the border into Canada or Mexico. Then you will see how ‘far your dollar goes’ when you buy or exchange your American dollar for a Canadian dollar or peso. Too, the exchange rate you receive on the market may be different than what you are offered at – perhaps – a bank. It behooves the exchanger to determine if they are getting a fair exchange. There is a way to decide this with just a little research.
The ‘currency-savvy’ are well aware that money is being bought and sold everyday by institutions and traders. It’s not rocket science, it’s a simple trade of one currency for another. Say, for example, you wanted to buy British Pounds or GBP, you would need to use another form of currency to do so. And that doesn’t mean you have to use the American dollar. Traders exchange all types of currency from all over the world so any currency is a legitimate option for exchange. Now, whatever currency is being used to buy another – together these form a ‘currency pair’. For example, if American dollars are used to buy the Canadian dollar the exchange rate would read like this: “USD/CAD pair”.
Now, if the exchange rate for this pair is perhaps 1.0888 that means that it would cost 1.0888 Canadian dollars to buy 1 United States dollars. If you look at the way the pair is written the first currency listed is meant to represent a single unit of that currency – in this case the dollar. When written out the second currency is the exchange rate or amount that is needed to buy one unit of the first currency. The formula is basic math – ‘1/exchange rate’.
For this pair the equation is 1/1.0888 = 0.91844 or in order to buy one Canadian dollar you only need less than one American dollar to make the exchange. When the exchange is made the position of the currencies is then switched – so it would read “CAD/USD”.
To learn more about currency exchanges contact Xchange of America today at 1-888-7-XOA-XOA.