A foreign exchange rate, or simply exchange rate or forex, is how much foreign currency you can buy with your local currency. This can also mean how much money you can send using your local currency to your loved ones in the destination’s (foreign) currency.
Let’s use an example.
Pretend that you are looking to exchange United States Dollars (USD) to Ethiopian Birr (ETB). The local currency is USD and foreign currency ETB. You have to find out how much ETB you can buy with 1 USD.
If the exchange rate is 1 USD = 55 ETB, which means you can buy 55 Birr with 1 Dollar. If you want to send 250 Dollars to your family in Ethiopia, you have to multiply 250 Dollars by 55 Birr. Your family will receive 13,750 Birr (250 USD x 55 ETB).
How do I read exchange rates?
Exchange rates are often quoted by banks or money transfer operators (MTO) in different ways. The following table provides a guide on what they mean.
|Exchange Rate Quote||Meaning|
|I want to buy…
|This is the exchange rate the bank or MTO is selling foreign currency for local currency.
For example: If you are sending money or travelling to the Ethiopian, this would mean you ‘want to buy’ Ethiopian Birr (foreign currency) for United States Dollars (local currency).
Or the ‘bank sells’ Ethiopian Birr for United States Dollars.
|I want to sell…
|This is the exchange rate the bank or MTO is buying foreign currency for local currency.
For example: If you are returning to United States from Ethiopia with money left over, this would mean you ‘want to sell’ Ethiopian Birr (foreign currency) for United States Dollars (local currency).
Or the ‘bank buys’ Ethiopian Birr for United States Dollars.
What is the mid-market rate?
This is the halfway point between the ‘buy’ and ‘sell’ exchange rates between two currencies at any given time. This rate is constantly changing along with the demand and supply of currencies.
Why are the exchange rates I see at the bank or MTO different from the mid-market rate?
The mid-market rate will usually differ from the exchange rates you will see quoted by the bank or MTO. This is because these organisations will apply a margin on top to profit from the transactions.
It is important to understand exchange rates, especially when sending money home. Luckily, finding the best exchange rates is now made easier by comparison website such as our Compare Rates tool in SaverAfricas. You can access our free comparison tool using the SaverAfricas app or website. You can compare different banks and money transfer operators and find the best one that works for you before you send money home!