Exchange Rates and Currency Exchange

Follow these steps when performing a currency exchange:

Step 1: Identify all known variables. Specifically, identify the currency associated with any amounts. You also require the mid-rate. If buy rates and sell rates are involved, identify how these rates are calculated.

Step 2: If there are no buy or sell rates, skip this step. If buy and sell rates are involved, calculate these rates in the manner specified by the financial institution.

Step 3: Apply Formula 7.4 using the appropriate mid-rate, buy rate, or sell rate to convert currencies.

This section opened with your backpacking vacation to the United States, Mexico, and Europe, for which you were quoted prices of $US$1,980$, $MXN$21,675$, and $€1,400$ for hostels. Assume all purchases are made with your credit card and that your credit card company charges 2.5% on all currency exchanges. Can your $C$6,000$ budget cover these costs?

Step 1: There are three currency amounts: $US$1,980$, $MXN$21,675$, and $€1,400$. Using the cross-rate table, the Canadian exchange mid-rate per unit of each of these currencies is $0.9787 US$$, $0.0823 MXN$$, and $1.4012 €$.

Step 2: Calculate the buy rates (since you are converting foreign currency into domestic currency) for each currency:

$US$=0.9787(1.025)=1.0032$

$MXN$=0.0823(1.025)=0.0844$

$€=1.4012(1.025)=1.4362$

Step 3: Apply Formula 7.4 to each of these currencies:

$US$:\ Desired\ Currency\ =US$1,980×1.0032=C$1,986.34.$

$MXN$:\ Desired\ Currency\ =MXN$21,675×0.0844=C$1,829.37.$

$€:\ Desired\ Currency\ =€1,400×1.4362=C$2,010.68.$

Putting the three amounts together, your total hostel bill is:

$$1,986.34+$1,829.37+$2,010.68=$5,826.39$

Because this is under budget by $$173.61$, all is well with your vacation plans.