- October 24, 2018
- Posted by: Paul Foster
- Categories: Business financial help, Managing business expenses, Managing business revenue
First off, it’s important to note:
The percentage used to calculate the exchange is not the same as the difference between the two currencies.
This is how the rates are calculated by the banks:
If 1.00 dollars Canadian equals .80 dollars US, you might assume the percentage to calculate exchange is .20 or 20%. It’s not.
If you are converting from Canadian to US you multiply by .80 or 80%. Try it on your calculator = 1.00 x .80 = .80.
But going from US currency to Canadian currency, you multiply by 1.25 or 125%. Try that on your calculator – 100 x 1.25 = 1.25.
The reason for the difference is due to using a different starting point to multiply the percentage by. Here is the best way to figure it out:
- Since (Currency 1) X Unknown Percentage Rate = (Currency 2)
- If you remember from math class this also means Unknown Percentage Rate = Currency 2/Currency 1
- If you are starting with Canadian dollars exchanging to US dollars, you calculate the percentage as US/CAD = 80/100 = 80%
- If you are starting with US dollars exchanging to Canadian dollars, you calculate the percentage as CAD/US = 100/80 = 125%
Once you know the percentage you can multiply it by any amount of funds you want to convert. For example if you have $400US, you can convert it to $400 x 125% = $500.
If you have $500 Canadian, you can convert it – $500 x 80% = $400 US.
If you find all these calculations too much, there’s an app for that.
When you check with the bank, the rates will be slightly different due to the fact they charge a small percentage to make a profit from buying and selling currencies.
Two money saving tips
- For Canadian who use US money, set up a US dollar denominated bank account. It is slightly cheaper to buy US for your US account and then withdraw it than to just buy US cash directly from the bank.
- You get a better rate for amounts over $25,000. If you are converting a lot of funds, doing it in larger amounts could save some cash.