What it means
Every currency has a price in terms of others, and that price changes constantly. A conversion chart presents the current rate in a simple table or calculator, while a forex chart plots the rate over time as a line or as candlesticks, which show the opening, closing, high and low for each period.
Both draw on the same data but answer different questions. Currency pairs are written with a base currency and a quote currency.
In the pair EUR/USD at 1.0800, one euro costs 1.0800 US dollars, so converting 1,000 euros gives 1,080 dollars. Reading the pair the right way round is the most basic skill needed to use any chart.
Most charts show a mid-market rate, which sits halfway between the price at which a dealer will buy a currency (the bid) and the price at which it will sell (the ask). Real customers rarely get the mid-market rate, because the bank, card provider or broker takes a margin.
The gap between what the chart shows and what you actually receive is a hidden cost of conversion. For businesses, the charts support practical decisions.
Finance teams use them to translate foreign invoices, to value overseas balances at the reporting date and to see whether a currency is trending in a way that affects budgets. Looking at a one-year line can show whether the current rate is unusually high or low compared with its recent range.
Charts are tools for understanding, not for prediction. A line that has risen for months may continue or reverse, and nobody can say with certainty which.
Sensible companies use charts to set budget rates and to decide how much to hedge, not to bet on the next move. It is also important to know the source and the time of the data.
Rates change second by second, and a chart may be delayed or may show an average for the day. When a transaction must be recorded in the accounts, the finance team should use the rate required by its accounting policy, such as the rate on the transaction date or a period-end rate.
In practice
Real-world examples.
Example
An importer in Germany receives an invoice for 80,000 US dollars. The accountant opens a conversion table to see how much that is in euros, then checks a one-year chart to see whether the dollar is unusually strong. She uses the figures to decide whether to pay now or wait.
Example
A travel company prices holiday packages in several currencies. Its finance team uses a chart to set an annual budget rate for each currency and updates the prices when the market moves outside an agreed range. The marketing team uses the same rates for its brochures.
Example
A freelance designer in Canada invoices a client in Australia. She uses a conversion tool to quote the price in Australian dollars and notes the date. When payment arrives, she compares the amount received with the quote to learn how much the exchange cost her.
Formula
Calculation
Converted amount = original amount x exchange rate (quote currency per unit of base currency). Hidden cost = amount x (mid-market rate - rate received).
Suppose a company must convert 50,000 GBP into US dollars. The chart shows a mid-market GBP/USD rate of 1.2502, so the chart value is 50,000 x 1.2502 = $62,510. The bank offers 1.2500, so the company receives 50,000 x 1.2500 = $62,500. The hidden cost is 62,510 - 62,500 = $10, which is about 0.016% of the amount converted.Case study
Seen in the real world.
This fictional story is illustrative only. Harbourlight Furniture is an invented company that buys timber from a supplier priced in a foreign currency.
The purchasing manager records each invoice using the rate on the chart at the time of ordering. When payment is made a month later, the rate has moved, and the accounts show a difference of $4,300 that nobody can explain. The finance director discovers that different staff are using different websites and different times of day.
The company sets a single rule. Invoices are converted at the rate required by the accounting policy, and a named person records the source and time of each rate. Over the next quarter the unexplained differences fall to a few hundred dollars, and the finance team can show the auditors how every figure was calculated.
Watch out
Common mistakes.
- Reading the pair upside down. EUR/USD tells you the price of one euro in dollars, not the other way round.
- Expecting to receive the chart rate. Banks and brokers add a margin, so the rate you get is usually worse.
- Using charts to predict the future. Past movements show history and volatility but do not guarantee what comes next.
Questions
People also ask.
What is a mid-market rate?
It is the rate halfway between the buying and selling prices, and it is the one most websites show.
What is a candlestick chart?
It is a chart where each bar shows the open, close, high and low of the rate for one period.
Which rate should I use for my accounts?
Use the rate required by your accounting policy and standards, usually the rate on the transaction date and the closing rate for balances.
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