Foreign Currency Exchange (Junior Cert Business Studies): Revision Notes
Foreign Currency Exchange
What is foreign currency exchange?
Foreign currency exchange (FX) is a financial service that allows people to convert their money from one currency to another. This service becomes essential when travelling abroad or conducting international business.
When you travel to a different country, you'll need that country's currency to make purchases. For instance, if you're an Irish person planning a holiday to the United States, you'll need to exchange your euros for US dollars to pay for meals, accommodation, and activities during your trip.
The exchange rate is the current value of one currency compared to another currency. For example, if 1 Euro equals 1.12 USD, this means each euro can be exchanged for 1.12 US dollars.
Where can you exchange foreign currency?
Several types of financial institutions offer foreign currency exchange services:
- Commercial banks - Most high street banks provide currency exchange
- An Post (the Irish postal service) - Offers currency exchange at many locations
- Bureau de change - Specialised currency exchange outlets, commonly found at airports and tourist areas
These institutions make currency exchange convenient and accessible for customers who need foreign money for travel or business purposes.
Understanding buy and sell rates
When you visit a financial institution for currency exchange, you'll notice they display two different rates for each currency: the 'we buy' rate and the 'we sell' rate. This dual pricing system exists because financial institutions both purchase foreign currency from customers and sell it to them.
The difference between these rates allows the institution to make a profit on currency exchange transactions. Think of it like any other business - they buy at one price and sell at a higher price to cover their costs and earn money.
How to calculate currency exchanges
Currency exchange calculations follow two simple rules depending on the direction of your exchange:
Converting euros to foreign currency:
- Multiply the euro amount by the 'we sell' rate
Converting foreign currency to euros:
- Divide the foreign currency amount by the 'we buy' rate
Let's look at a practical example to see how this works:
Worked Example: Currency Exchange Calculations
Imagine Sarah Murphy is travelling to Australia and wants to exchange €1,000 for Australian dollars. The bank's 'we sell' rate for Australian dollars is 1.5 on the day she visits.
Step 1: Converting euros to foreign currency Calculation: €1,000 \times 1.5 = AUD \1,500$
So Sarah will receive $1,500 Australian dollars for her €1,000.
Step 2: Converting foreign currency back to euros Now imagine Sarah returns from her holiday with $200 Australian dollars that she wants to convert back to euros. The bank's 'we buy' rate is 1.48 on the day of her return.
Calculation: \200 \div 1.48 = €135.13$
Sarah will receive €135.13 for her remaining Australian dollars.
Fees and charges
Financial institutions charge customers a fee for providing foreign currency exchange services. This fee is called a commission. The commission is typically a small percentage of the total amount being exchanged or a flat fee, depending on the institution's pricing policy.
When planning currency exchanges, it's wise to factor in this additional cost to ensure you have sufficient money for your trip or transaction.
Key Points to Remember:
- Foreign currency exchange allows you to convert money from one currency to another for travel or business needs
- Exchange rates change daily and determine how much foreign currency you'll receive for your euros
- 'We sell' rates are used when converting euros to foreign currency (multiply your euros by this rate)
- 'We buy' rates are used when converting foreign currency back to euros (divide the foreign currency by this rate)
- Commission fees are charged by financial institutions for providing the exchange service