30 July 2011

Simple Method to determine Forex rate yourself

Here's something probably you could relate to.

When I need to go to the States for business trip, I go to the Pengurup Wang Berlesen aka Licensed Money Changer and wonder - should I look at the Buy rate, or the Sell rate? What if I have US dollars in hand and need to change that to Ringgit instead?

Very easy actually. You just need to remember - the Pengurup Wang always profit; means you are always on the losing side. That's just how they make money. It's strictly business.

Take Australian dollar - BUY 3.2284 and SELL 3.2312. Since I know I will be getting less than AUD 100 for MYR 100, I need to divide either of the rate. But which one?

Ask yourself this - which one, if used as divisor, will yield a smaller number?

Simple maths right - you divide by a larger number (divisor) to obtain a smaller number. "Smaller" in this sense means you are on the "losing side". In this case, I will divide MYR 100 with the SELL rate - 3.2312, which yield, AUD 30.95.

Another way to intepret this is that the BUY/SELL rate always refer to the Pengurup Wang. This is the rate he is willing to buy back your foreign currency/sell you foreign currency in exchange for the Ringgit.
Say, now you are back from Australia and need to exchange AUD 30.95 into Ringgit. Remember, you are still (and ALWAYS) on the losing side and you know you will get > MYR 30.95 for AUD 30.95. Therefore you use the BUY rate - 3.2284 (the lesser of the two rate) and multiply this with AUD 30.95  and you get MYR 99.92 for AUD 30.95.

In these 2 transactions, the Pengurup Wang profits by (100 - 99.92) = 8 cents.

Another example, Chinese Renminbi, CNY with BUY/SELL rate of 0.4586 and 0.4589 respectively.

You have MYR 100. To convert to CNY, divide 100 with 0.4589, to get CNY 217.91.

Now, to convert back CNY 217.91 to MYR, multiply this with 0.4586, to get CNY 99.93.

Again, the Pengurup Wang profits by 7 cents from these two transactions

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