What Is The Process Behind Currency Conversion? A Beginner’s Guide

We are all aware that different countries have different currencies or in other words different operating money values that are used locally. Though from a layman’s perspective they may all look the same, there is a lot of difference in their values. This is because of the fact that different countries’ currencies have relatively lesser or greater value in the world monetary market.

For instance, the currency of USD or Euro is better valued than Indian rupees or Singapore dollars. This is because, the growth in economy or their role in the world economy is greater and so they have greater value per unit.

Because of these factors, all currencies are not the same and the use of one in the place of another is not possible without currency conversion. Currency conversion is merely the process of determining the equivalent of a particular denomination of one currency in terms of another currency.

For instance, finding the equivalent of 1 American dollar in terms of Indian rupees is called currency conversion. Here the USD and INR form a currency pair. Currency pair is the term used to denote the original and converted currencies in a currency conversion.

Currency conversion requires the use of a value known as exchange rate. This is the rate at which one unit of a particular currency can be bought or sold with another currency. In other words, you can understand with the previous example that 50 Indian rupees can be sold for 1 US dollar or the opposite of 1 US dollar can be used to buy 50 INR.

The exchange rates are stated for different currency pairs and are subject to change with the fluctuations in the value of these in the Foreign exchange market. Based on these exchange rates, currency conversion calculators are generally used to perform currency conversion tasks.

In short, all that you need to know about currency conversion is that,

1. The original currency is called the base currency and the second currency is called the quote currency and the value of the former is determined by comparing it with the latter.

2. Exchange rate is the rate of the currency pair is the value of the base currency which is equivalent to one unit of the quote currency.

3. Exchange rates change based on the value of currencies in the Foreign exchange (FOREX) market.

This must have helped you understand the basics of currency conversion!