Foreign exchange Different countries different currencies You can

Foreign exchange

Different countries – different currencies You can exchange your money to an equivalent amount in the local currency. You can find the equivalent amount using an exchange rate.

Exchange rate: shows the relationship between the values of currencies. published widely. change daily.

See examples of currency exchange tables at: www. växelkurs. se www. forex. se

The exchange rates in a country – ususally given as the amount of foreign currency that is equal to one unit of the local currency.

Example Given that one Swedish krona (1 SEK) is equivalent to 0. 1225 American dollars ($0. 1225 US), find how many American dollars you could buy for 4 500 Swedish kronor.

1 SEK = $0. 1225 US 4 500 SEK = 4 500 x $0. 1225 US = $551. 25 US

• The buying and selling rates for banks are not the same. Why?

Buying and selling international currency

Selling To calculate the amount of a foreign currency that you will receive by selling another currency, use the selling exchange rate.

Foreign currency bought = other currency sold x selling exchange rate

Example Given that € 1 = 10. 5568 SEK when selling, convert € 600 into Swedish kronor. Swedish currency bought = 600 x 10. 5568 SEK = 6 334. 08 SEK

To calculate the amount it costs in your local currency to purchase a foreign currency, use the selling exchange rate.

Cost in own currency = foreign currency bought selling exchange rate

Example What does it cost in Swedish kronor to buy € 3000, if 1 SEK = 0. 0947

Cost in SEK = 3000_ 0. 0947 = 31 679

Buying You have currency from another country. You want to change it into your own country’s currency. Use the buying exchange rate.

Your currency bought = foreign currency sold buying exchange rate

Example You have $350 US and exchange it for Swedish kronor. How many kronor will you receive if 1 SEK = $0. 127 US

Swedish kronor bought = 350 _ 0. 127 = 2 756 SEK

Currencies can also be converted using a conversion graph. See example on page 424.

Commission on currency exchange

When a bank exchanges money, they charge you a commission (a charge) for this service. This commission may vary from 0. 5% to 3%.

Example A bank changes Swedish kronor to other currencies at a fixed commission of 1. 5%. Per wants to convert 4000 SEK to Danish kronor (DKK), given that 1 SEK buys 0. 687 DKK. How much commission must he pay? How many Danish kronor does he receive?

Commission = 4000 x 1. 5% = 4000 x 0. 015 = 60 SEK

Per receives (4000 – 60) x 0. 687 = 3940 x 0. 687 = 2 707 DKK

Example A bureau de change exchanges Swedish krona for Japanese Yen. The bureau sells at 8. 7133 and buys at 9. 062 Yen per SEK. Maureen wishes to exchange 7 000 SEK for Yen.

How many Yen will she receive? If these Yen are immediately converted back to Swedish kronor, how many will she receive? What commission has she paid on this double transaction?

• How many Yen will she receive? Maureen receives 7000 x 8. 7133 = 60 993. 1

• If these Yen are immediately converted back to Swedish kronor, how many will she receive? Maureen receives 60 993. 1 = 6 730. 64 9. 062

• What commission has she paid on this double transaction? The resultant commission is 7 000 - 6 730. 64 = 269. 36 SEK

Travellers cheques An alternative to cash. Becoming less common – debit and credit cards becoming more common. Usually, the bank providing the travellers cheques charge 1% of the value of the cheques when they are issued.

Cost of travellers cheques = amount of foreign currency x 101% selling exchange rate

Example. You want to buy 3 000 UK pounds (GBP) worth of travellers cheques. 1 SEK is 0. 0813 GBP. What is the cost? cost = 3 000_ x 1. 01 0. 0813 = 37 269 SEK

Exercise 13 A. 1 Page 422. Exercise 13 A. 2 Page 424. Exercise 13 A. 3 Page 425 Exercise 13 A. 4 Page 426