How to do Currency Conversion

This question it's all about currency conversion which can seem a bit daunting because you're given a lot of data and it's usually quite wordy but we're going to break it down step by step so that you can find the easiest way to do it. Here, we're presented with a table and we're told that on day two we purchase £5,500 of USD and convert them back to GBP on day four.

Step 1: Work out the current value

We need to find out what the value of our currency is now so write this out as £5,500 : X

We write it as a ratio and underneath this write the currency conversion so we know that £1 equals $1.62.

Now if you divide £5,500 by one and X by 1.62, we can try and work out what x equals (where X represents the number of dollars).

£5,500 divided by one is just £5,500. If we multiply both sides by 1.62 you’ll be able to get x on its own. X is equal to £5,500 multiplied by 1.62 which is $8,910.

Step 2: Work out the future value

Now we’ve worked out what we have on day two, we need to work out what this is in pounds on day four. Like before, we’re going to write it in ratios. $8,910 : y and we write Y this time because that represents the number of pounds that we’re trying to work out and underneath this you write the currency conversion so 1.61 : 1.

Now we’ve written them that way round because we’ve got the dollars first and then the pounds so as before if you divide them by each other, you’ve got $8,910 divided by 1.61 is equal to Y over one. Y divided by one is still always going to be Y so you’ve got the calculation Y is equal to $8,910 divided by 1.61. If you complete this calculation, you get the answer of £5,534.

Step 3: Calculate the differnce

It’s not actually asked in this instance, but often you’ll be required to calculate the profit or loss from converting currency over time as the conversion rate changes. In this case, we had £5,500 on day 2 and after converting back on day 4, we have £5,534. The profit is the difference which is £34.