Exchange Rates & Currency Conversion

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  • 0:02 Exchange Rates
  • 1:35 Currency Conversion
  • 3:40 Example 1
  • 4:08 Example 2
  • 5:48 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After watching this video lesson, you will learn how currency conversion works. You will be able to convert from one currency to another with ease. Learn the process behind currency conversion.

Exchange Rates

Are you a world traveler? Do you want to be a world traveler? If you are or do, then you will come across exchange rates. These rates tell you how much one currency is worth in another. For example, if you have 100 U.S. dollars and you plan to go to Britain, then the exchange rate will tell you how much your 100 U.S. dollars is worth in British pounds. Sometimes, you will find that you end up with more money, and other times you find yourself with less money. It is all dependent on the exchange rate. Who usually does this conversion for you? Usually, it is banks. While you can let them make the calculation for you, it will be to your advantage to understand how this is done so that you can expect a certain amount in the end.

How do these exchange rates look like? You will see a table with a list of other countries with your home currency at the top. Your home currency may say 1.00. If you are in the U.S., then the 1.00 means 1 U.S. dollar. Then, the other countries will have decimal numbers next to them. This shows you how much 1 U.S. dollar is worth in the currencies of the other countries.

exchange rates

In this exchange rate table, we see that 1 U.S. dollar is worth 0.63 British pounds. This exchange rate table also has a second column that gives the exchange rate for visitors that want to exchange their foreign currency to the home currency. So, for British pounds, this table tells us that 1 British pound equals 1.58 U.S. dollars.

Currency Conversion

This process of converting from one currency to another is called currency conversion. It requires only two steps. The first is finding the exchange rate. The next is following this formula:

exchange rates

In this formula, the exchange rate is the new currency divided by how much it is worth in your home currency. For example, in November 2014, 1 U.S. dollar is worth 0.63 British pounds. Going the other way, 1 British pound is worth 1.58 U.S. dollars. So, the exchange rate for changing from U.S. dollars to British pounds is 0.63 British pounds/1 U.S. dollar, or 0.63. The exchange rate for changing from British pounds to U.S. dollars is 1.58 U.S. dollars/1 British pound = 1.58. We always divide the new currency by the home currency. The currency that you want to change to goes on top, and the currency you have goes on the bottom.

Once we have this exchange rate, either by calculating it or by looking it up from an exchange rate table, we can then use the formula plugging in all our numbers. As you can see, the exchange rate table gives you the exchange rate that you need for converting to other currencies. If your home country is somewhere other than the U.S., then you will need to find the exchange rate table for that other country. These tables are easily accessible on the Internet and from banks.

For example, if we had 80 U.S. dollars and we want to convert it to British pounds, we would use the 0.63 exchange rate for converting U.S. dollars to British pounds. Our formula then gives 80 x 0.63 = 50.4, or 50.40 British pounds. So, 80 U.S. dollars is worth 50.40 British pounds.

Let's take a look at a couple of scenarios.

Example 1

Jenny is traveling from the U.S. to Australia. What is the exchange rate and how much is 400 U.S. dollars worth in Australian currency?

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