16.08 Exchange rates

Different countries throughout the world have their own currency.

• In Australia, we have the Australian Dollar, which is represented by the three letter code AUD.
• The United States of America has the United States Dollar, and their code is USD.
• The United Kingdom has the pound sterling, with code GBP.
• Countries in Europe who are part of the eurozone, have the Euro, and their code is EUR.

When you travel overseas, you will be purchasing products and services in the currency of that country.

For example, if you are travelling to France and you wish to take cash, you will exchange some AUD for some EUR. You can do this at a bank or at a Foreign Exchange outlet either here in Australia, or once you arrive at your destination.

If instead, you will mainly use a credit card, then your bank will convert your AUD to EUR, and charge you a transaction fee for doing so. This is also a common occurrence when purchasing goods online from international vendors.

Exchange rates

When you want to exchange one currency for another, it is very rarely a one-to-one swap. Instead, there is a relationship between the two currencies which can be expressed as a rate.

In early 2016, $1$1 AUD was worth $0.68$0.68 EUR. So for your one dollar Australian coin, you only receive $0.68$0.68 euros in return. If we wanted to, we could write this as the rate $0.68$0.68 EUR/AUD, although this is not common practice.

These rates change daily as the circumstance of each economy fluctuate and influence each other. These changes are often very unpredictable.

Some implications of the change in the value of a currency are as follows:

• A drop in the value of the AUD, compared with other currencies, means that more Australians will be encouraged to buy products in Australia, rather than from an online overseas outlet, because items are cheaper.
• Also, a drop in the value of the AUD will encourage Australian exports, because our products will appear cheaper to other countries.
• An increase in the value of the AUD might mean Australians can better afford an overseas holiday because the high exchange rate allows you to purchase more goods and services while on holiday.
• Similarly, an increase in the value of the AUD might mean Australia can afford to import more from overseas.

 

Buying currency

When you wish to exchange your country's currency for the currency of another country, you are considered to be buying that currency.

As with anything you buy, the purchase price of that currency will be different, depending on where you purchase.

Let's look at an example.

This first image shows you the official exchange rate for exchanging $1$1 AUD for Euros at a point in time.

This next table shows you how many Euros the ANZ bank would give buy and sell to you for every $1$1 AUD on the same day.

			Bank buys			Bank Sells
Country	Currency	Currency code	IMT/TT	Travel card/Chq	Notes	IMT/TT	Travel Card/Chq	Notes
USA	Dollars	USD	$0.7127$0.7127	$0.7166$0.7166	$0.7216$0.7216	$0.6540$0.6540	$0.6540$0.6540	$0.6540$0.6540
EURO MONETARY UNION	Euro	EUR	$0.6559$0.6559	$0.6664$0.6664	$0.6786$0.6786	$0.5966$0.5966	$0.5966$0.5966	$0.5966$0.5966

And finally, this image shows you how many euros a Foreign Exchange centre would give you for every $1$1 AUD, again on the same day.

As you can see, when buying another currency, you'll receive less than the official rate. These various outlets make money on the sale.

Worked examples

example 1

If we had $\$500$$500 AUD, how many euros could we buy at ANZ?

Think: Looking at the above rate at ANZ, we can see that $1$1 AUD is exchanged for $0.5966$0.5966 EUR. Since we have $500$500 AUD, we need to multiply $500$500 by $0.5966$0.5966.

Do:

$1$1 AUD	$=$=	$0.5966$0.5966 EUR	Write the exchange rate as an equation.
$500\times1$500×1 AUD	$=$=	$500\times0.5966$500×0.5966	Multiply both sides by $500$500 to keep balanced.
$500$500 AUD	$=$=	$298.30$298.30 EUR

Realistically, a bank won't hold coins in other currencies, so you'd have to spend a little more AUD to get $300$300 EUR.

Example 2

If we just bought $600$600 EUR from ANZ bank, how much AUD did we spend?

Think: Using the same rate as in the first example, we will this time need to divide $600$600 by $0.5966$0.5966.

Do: $\frac{600}{0.5966}=1005.70$6000.5966​=1005.70 AUD

This can also be calculated using a balanced equation to follow the process and be clear when to divide and when to multiply.

$0.5966$0.5966 EUR	$=$=	$1$1 AUD	Divide both sides by $0.5966$0.5966 to find the cost of $1$1 Euro.
$1$1 EUR	$=$=	$\frac{1}{0.5966}$10.5966​ AUD	This is approximately $1.68$1.68 AUD but don't round until your final answer.
$600$600 EUR	$=$=	$\frac{600}{0.5966}$6000.5966​ AUD	Multiply both sides by $600$600 to find the cost of $600$600 Euro.
$600$600 EUR	$=$=	$1005.70$1005.70 AUD

 

Selling currency

When you exchange another currency for your own, you are selling, instead of buying.

Worked example

Example 3

Let's say you've come back from your wonderful holiday in France and you have $50$50 EUR left over in cash. You can't spend euros in Australia, so you return to the ANZ bank to exchange it back to AUD.

Think: If we use the same ANZ table given above (although realistically the rates would likely have changed), we can see that the bank buys from you (or you sell to them) $0.6786$0.6786 EUR and gives you $1$1 AUD in return. In other words, for every $0.6786$0.6786 EUR you have, you'll get $1$1 AUD. 

We'll divide our $50$50 EUR by $0.6786$0.6786 to see how many AUD we'll get.

Do: $\frac{50}{0.6786}=\$73.68$500.6786​=$73.68 AUD. Or we can calculate this set out as follows:

$0.6786$0.6786 EUR	$=$=	$1$1 AUD	Divide both sides by $0.6786$0.6786 to find how many Australian dollars $1$1 Euro will buy.
$1$1 EUR	$=$=	$\frac{1}{0.6786}$10.6786​AUD	This is approximately $1.47$1.47 AUD but don't round until your final answer.
$50$50 EUR	$=$=	$\frac{50}{0.5966}$500.5966​	Multiply both sides by $50$50 to find how much $50$50 Euro can purchase.
$50$50 EUR	$=$=	$73.68$73.68 AUD

When travelling overseas or purchasing items online be aware of exchange rates and fees your bank may charge so you don't accidentally overspend your budget or pay too much for an item.

 

Practice questions

QUESTION 1

QUESTION 2