CURRENCY CONVERSION I - TWO WAY RATES
By CM Lim
FOREIGN CURRENCY CONVERSION
Foreign currency conversion can at times be confusing especially when one is in a foreign country. This first article of a two-part series look into Two common scenarios faced, explore how confusion arises, and how to orient one's point of view to be in control of the calculator or mobile apps when converting foreign currency.
WHEN IS CURRENCY CONVERSION CONFUSING?
Singaporean Mr. Roy is going to Bangkok for 3 days, he visit his money changer to have his S$500 change to Thai Baht, he got the exchange rate of
S$1 for 25 Baht
With S$500, he bought 12,500 Baht (S$500 x 25)
For the time being, Roy kept in mind the exchange rate at being S$1=25 baht.
At the end of his first day in Bangkok, Roy had spent most of his money and is left with not more than 2000 Bath.
He look up for money changer in Bangkok and wishes to change another S$500 cash he'd brought along with, and this time the money changer gave him an exchange rate of,
1 Baht = 0.04 Singapore cents
The money changer works out S$500 and gave him 12,500 Baht. (S$500 / 0.04)
With the exchange rate he had at the back of his mind being S$1=25 Baht, Roy now struggles to make sense of this confusing mathematics, how did he get this same amount of Baht on a seemingly different rate? and where did that 1 Baht = 0.04 rate ever come about?
RECIPROCAL RATE
Fortunately, to understand above scenario, one just have to bear in mind that every Exchange Rate has a Reciprocal Rate, in a nutshell, there are two rates at play in foreign currency exchange or even in the simplest exchange of Bartering, take a look at this example
1 Papaya can change for 2 Apples, therefore
1 Apple can change for half a Papaya.
It's easy to understand above's reciprocal relationship because we can visualize how big the papaya is relative to the apples.
This same understanding is applicable in the following currency conversion
S$1 can change for 25 Baht.
1 Baht can change for 0.04 Singapore cents.
You can easily work out the reciprocal rate with a simple formula using this
From the above example of S$1 in exchange for 25 Bath,
Simply calculate as in:
S$1 / 25 Baht = 0.04 Singapore cents.
Doing the reverse
1 Baht / S$0.04 = 25 Baht
MORE EXAMPLES
S$1 = RM3 (Malaysia Ringgit)
Reciprocal rate : 1 / 3
RM1 = 0.33 Singapore cent
S$1 = 0.75 US cents
Reciprocal rate : 1 / 0.75
US1 = S$1.33 Singapore dollar equivalent
SUMMARY
Using Thai Baht as an example, your local money changer quotes you 25 Baht.
When you are in Thailand, the money changer quote you S$0.04 because he sees Baht as his home currency, any which way, you know what is going on.
Next will be to convert the amount of money using either reciprocal rate with the right operator, Multiply or Divide, which will be covered in part II.
CURRENCY CONVERSION II - MULTIPLY OR DIVIDE
FOREIGN CURRENCY CONVERSION
Foreign currency conversion can at times be confusing especially when one is in a foreign country. This first article of a two-part series look into Two common scenarios faced, explore how confusion arises, and how to orient one's point of view to be in control of the calculator or mobile apps when converting foreign currency.
WHEN IS CURRENCY CONVERSION CONFUSING?
Singaporean Mr. Roy is going to Bangkok for 3 days, he visit his money changer to have his S$500 change to Thai Baht, he got the exchange rate of
S$1 for 25 Baht
With S$500, he bought 12,500 Baht (S$500 x 25)
For the time being, Roy kept in mind the exchange rate at being S$1=25 baht.
At the end of his first day in Bangkok, Roy had spent most of his money and is left with not more than 2000 Bath.
He look up for money changer in Bangkok and wishes to change another S$500 cash he'd brought along with, and this time the money changer gave him an exchange rate of,
1 Baht = 0.04 Singapore cents
The money changer works out S$500 and gave him 12,500 Baht. (S$500 / 0.04)
With the exchange rate he had at the back of his mind being S$1=25 Baht, Roy now struggles to make sense of this confusing mathematics, how did he get this same amount of Baht on a seemingly different rate? and where did that 1 Baht = 0.04 rate ever come about?
RECIPROCAL RATE
Fortunately, to understand above scenario, one just have to bear in mind that every Exchange Rate has a Reciprocal Rate, in a nutshell, there are two rates at play in foreign currency exchange or even in the simplest exchange of Bartering, take a look at this example
1 Papaya can change for 2 Apples, therefore
1 Apple can change for half a Papaya.
It's easy to understand above's reciprocal relationship because we can visualize how big the papaya is relative to the apples.
This same understanding is applicable in the following currency conversion
S$1 can change for 25 Baht.
1 Baht can change for 0.04 Singapore cents.
You can easily work out the reciprocal rate with a simple formula using this
1 / RATE
From the above example of S$1 in exchange for 25 Bath,
Simply calculate as in:
S$1 / 25 Baht = 0.04 Singapore cents.
Doing the reverse
1 Baht / S$0.04 = 25 Baht
MORE EXAMPLES
S$1 = RM3 (Malaysia Ringgit)
Reciprocal rate : 1 / 3
RM1 = 0.33 Singapore cent
S$1 = 0.75 US cents
Reciprocal rate : 1 / 0.75
US1 = S$1.33 Singapore dollar equivalent
SUMMARY
Using Thai Baht as an example, your local money changer quotes you 25 Baht.
When you are in Thailand, the money changer quote you S$0.04 because he sees Baht as his home currency, any which way, you know what is going on.
Next will be to convert the amount of money using either reciprocal rate with the right operator, Multiply or Divide, which will be covered in part II.
CURRENCY CONVERSION II - MULTIPLY OR DIVIDE
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CURRENCY CONVERSION I - TWO WAY RATES
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