Currency, Exchange Rates & Commission (AQA Level 3 Mathematical Studies (Core Maths))

Currency, Exchange Rates & Commission

What are exchange rates?

• Exchange rates are used to compare and convert between different currencies

• Exchange rates between different currencies change all the time

  • This is due to trading between different international markets

• Day-to-day these changes will only be small, but larger changes occur in the long term

  • For example, in 2003, £1 was worth $1.63 (US Dollars)

  • By 2023, £1 was worth $1.24

• Occasionally, dramatic economic events can cause significant changes in exchange rates

  • For example when the UK voted to leave the European Union in 2016, the value of the pound fell to £1.315 for $1,

    • This was its lowest value since 1985

    • The pound lost almost 10% of its value in one trading day

• Exchange rates are important as they dictate the purchasing power of one country compared to another

  • If the value of the pound increases, this makes importing goods to the UK cheaper

How do I convert between currencies?

• Start by writing the exchange rate

  • £1.00 (GBP) = €1.17 (EUR)

• To convert from GBP to EUR, multiply by 1.17

  • Because 1.00 × 1.17 = 1.17

• To convert from EUR to GBP, divide by 1.17

  • Because 1.17 ÷ 1.17 = 1.00

• To find £28 in Euros

  • 28 × 1.17 = €32.76

• To find €75 in Pounds

  • 75 ÷ 1.17 = £64.10 (to the nearest penny)

What is commission?

• When a company exchanges currencies there will be a charge, known as commission, for providing this service

  • Commission is usually a percentage of the value being exchanged

• Different foreign exchanges will charge different rates of commission

  • They will also offer slightly different exchange rates between the currencies

  • Both of these methods are how foreign exchanges make a profit

• Both factors should be considered when deciding where to exchange money

• Consider purchasing £500 worth of Australian Dollars ($)

  • The exchange rate is $1.00 = £0.52

  • A particular foreign exchange charges 1.5% commission

• To find how many Australian Dollars you will receive:

  • Change £500 into Australian Dollars

    • 500 ÷ 0.52 = $961.54384615...

  • Decrease this by the commission (1.5%)

    • This is equivalent to finding 98.5%

    • $961.54384615... × 0.985 = $947.12 (to the nearest cent)

    • So you will receive $947.12

• The foreign exchange in this scenario has made £7.50 in commission

  • 0.015 × £500 = £7.50

  • The commission can be calculated in either currency; it will have the same value