What is a currency conversion question?
Alongside questions on fractions, sequences, charts and basic algebra, a numerical reasoning test will likely include questions on calculating exchange rates.
These questions will involve a currency pair, the exchange rate and a conversion amount. You will be asked to calculate the amount of one currency in the pair received, when converting a volume of the other.
Currency conversation tends not to be a common calculation in our everyday lives. Unless you are an active trader in the forex market, trips abroad are the main context for encountering exchange rates. The calculation is, however, simple to perform once the basic method is grasped.
Success in a numerical reasoning test requires speed and accuracy, so learning how to calculate currency conversion questions rapidly will be of aid when taking the test. Becoming accustomed to the information given, and the calculations required in different question scenarios, will ensure you can tackle any exchange rate question, regardless of the context.
How to read exchange rates
Reading exchange rates is a simple procedure. An exchange rate is made up of a currency pair, and at any given time displays a snapshot into the relationship between the two currencies.
In an exchange rate, the first currency listed stands for one unit of that currency. The exchange rate (typically shown to two decimal places in numerical reasoning questions) indicates what value of the latter currency would purchase one unit of the former.
For example, you may be given the following information:
This means that it costs US$1.21 to purchase €1 or, in other words, €1 = US$1.21. From this, you can also calculate how much it costs to buy US$1 using EUR, by dividing 1 by the exchange rate.
1/1.21 = 0.82
So, this means it costs €0.82 to purchase US$1 or, in other words, US$1 = €0.82. This price is reflected in the inverted currency pair:
You may be faced with questions that ask about the first or the second currency in the given pair.
The currency pairs used in the questions may vary and could include popular currencies such as the GBP (British Pound), CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar), NZD (New Zealand Dollar) and JPY (Japanese Yen).
Recognising these abbreviations as relating to currency will help you to rapidly identify a currency conversion question. Regardless of the currencies involved, the way to read the implications of an exchange rate and the conversation calculation steps remain the same.
How to calculate currency conversion
In a currency conversion question, you may get the currency information as part of an explanation, or as statistics in a table. Either way, all the information you need to calculate the answer will be within the question.
You may be asked to calculate the volume of one currency you would receive from a given exchange rate and currency amount. For example:
Sarah has US$750 to convert into GBP for her upcoming trip. The exchange rate currently stands at USD/GBP 0.73. How much money will she have in GBP?
You are being asked to find the volume of the second currency in the pair. First read the exchange rate. In this case, $1 USD = £0.73 GBP.
To calculate the number of British Pounds US$750 yields from this USD/GBP exchange rate, the calculation is as follows:
Unknown currency amount (second currency) = Known currency amount (first currency) x Exchange rate
Exchange rate: USD/GBP 0.73
GBP = USD$750 x 0.73
GBP = £547.50
To convert back to check the amount, divide the number of British Pounds by 0.73 to get the number of US dollars.
If the question gave the same exchange rate information of USD/GBP 0.73, but instead Sarah was intending to convert £750 into US Dollars, the calculation required would be as follows:
You are being asked to find the volume of the first currency in the pair. First, read the exchange rate given: USD/GBP 0.73 (US$1 = £0.73).
Unknown currency amount (first currency) = Known currency amount (second currency) / Exchange rate
USD = GBP £750 / 0.73
USD = $1027.40
The logic behind this is that (as indicated in the How to Read Exchange Rates section), from the information USD/GBP 0.73, we can calculate that £1 = US$1.37 by doing the calculation 1/0.73.
$1.37 x the US$750 Sarah holds = USD $1,027.40
It is important to understand the mechanics of how each conversion amount is calculated and why it is so. This will ensure you can tackle currency conversion in any context or arrangement.
You may also be asked questions involving currency conversion commissions. These involve skills around both currency conversion and percentages. For example:
Tom is converting CAD $200 into EUR, but his provider is charging a 5% commission on the transaction. The exchange rate is CAD/EUR 0.64. How much money (in EUR) does Tom receive to take on holiday?
EUR = CAD $200 x 0.64
EUR = €128
5% of 128 = 128 – 5%
The logic behind this is that:
To find 5%: €128 x 5% = €6.40
To calculate the final amount received: €128 – €6.40 = €121.60
Whilst these calculations are fairly simple, understanding the mechanisms will help you to answer the currency conversion questions confidently, regardless of the figures involved.