How It Works

Follow these steps when performing a currency exchange:

Step 1: Identify all known variables. Specifically, identify the currency associated with any amounts. You also require the mid-rate. If buy rates and sell rates are involved, identify how these rates are calculated.

Step 2: If there are no buy or sell rates, skip this step. If buy and sell rates are involved, calculate these rates in the manner specified by the financial institution.

Step 3: Apply Formula 7.4 using the appropriate mid-rate, buy rate, or sell rate to convert currencies.

This section opened with your backpacking vacation to the United States, Mexico, and Europe, for which you were quoted prices of \(US$1,980\), \(MXN$21,675\), and \(€1,400\) for hostels. Assume all purchases are made with your credit card and that your credit card company charges 2.5% on all currency exchanges. Can your \(C$6,000\) budget cover these costs?

Step 1: There are three currency amounts: \(US$1,980\), \(MXN$21,675\), and \(€1,400\). Using the cross-rate table, the Canadian exchange mid-rate per unit of each of these currencies is \(0.9787 US$\), \(0.0823 MXN$\), and \(1.4012 €\).

Step 2: Calculate the buy rates (since you are converting foreign currency into domestic currency) for each currency:

\(US$=0.9787(1.025)=1.0032\)

\(MXN$=0.0823(1.025)=0.0844\)

\(€=1.4012(1.025)=1.4362\)

Step 3: Apply Formula 7.4 to each of these currencies:

\(US$:\ Desired\ Currency\ =US$1,980×1.0032=C$1,986.34.\)

\(MXN$:\ Desired\ Currency\ =MXN$21,675×0.0844=C$1,829.37.\)

\(€:\ Desired\ Currency\ =€1,400×1.4362=C$2,010.68.\)

Putting the three amounts together, your total hostel bill is:

\($1,986.34+$1,829.37+$2,010.68=$5,826.39\)

Because this is under budget by \($173.61\), all is well with your vacation plans.