Finance · Topic 4 of 5
Foreign Exchange
Theory
The Golden Rule: When converting between two different foreign currencies, you must almost always use British Pounds (£) as a "middle bridge" unless a direct exchange rate is explicitly given. Because you are dealing with money, ensure your final answers are always rounded to exactly two decimal places where appropriate.
1. The Basic Conversions
Every currency question comes down to one pair of rules — multiply going out of pounds, divide coming back:
where the rate is the amount of foreign currency you get for .
- Pounds to Foreign Currency: You multiply the amount in pounds by the exchange rate. (Example: If £1 = $1.30, then £100 = 100 × 1.30).
- Foreign Currency to Pounds: You divide the foreign amount by the exchange rate. (Example: $130 ÷ 1.30 = £100).
2. Foreign to Foreign (The Bridge Method)
If a question asks you to convert Dollars into Euros, you generally cannot do this in one step.
- Step 1: Divide the Dollars by the Dollar exchange rate to convert the money back into Pounds.
- Step 2: Multiply that Pound value by the Euro exchange rate to find the final amount.
3. Multi-stage Trip Calculations
A classic 4-mark question involves a person travelling to Country A, spending some of their money over several days, and then converting the leftover money for a trip to Country B.
- Convert the original budget into Currency A.
- Calculate their total spending and subtract it from their Currency A total.
- Convert the remaining Currency A back into Pounds (Divide).
- Convert those Pounds into Currency B (Multiply).
⚠️ Common Examiner Traps
- The "Wrong Operation" Trap: The most common error in exam conditions is dividing when you should multiply, or vice versa. Always do a quick logic check: if £1 gets you more than 1 unit of foreign currency (e.g. 150 Yen), your foreign amount should always be a much bigger number than your pounds.
- The "Forgetting to Subtract" Trap: In multi-stage holiday questions, candidates frequently convert the entire original amount into the second currency, completely forgetting to subtract the money the person actually spent on their first holiday.
- The "Rounding Too Early" Trap: When using the "Bridge Method" (Currency A → Pounds → Currency B), do not round the middle Pounds step to two decimal places if it is a long recurring decimal. Keep the full number in your calculator display until the very final step to avoid a rounding error costing you a mark.
Worked examples
Example 1
David travels to Japan and then to Australia. The exchange rates are:
- £1 = 185 Japanese Yen (JPY)
- £1 = 1.90 Australian Dollars (AUD)
David converts £850 into Japanese Yen. He stays in Japan for 5 days, spending exactly 22,000 JPY each day. He then converts his remaining JPY into Australian Dollars. Calculate how many Australian Dollars he receives. (4 marks)
Step 1: Convert his starting money into JPY (Multiply).
Step 2: Calculate his total spending and subtract it to find his remaining JPY.
Step 3: Convert the remaining JPY back into Pounds (Divide).
Step 4: Convert the Pounds into AUD (Multiply).
Final Answer: He receives $485.27 AUD (rounded to 2 d.p. for money).
Example 2
Sarah's uncle in the USA sends her a gift of $150 for her birthday. Sarah is going on a school trip to France, so she exchanges the money for euros. The exchange rates are:
- £1 = $1.25
- £1 = 1.15 euros
Calculate how many euros Sarah received. (3 marks)
Step 1: Convert the US Dollars back into Pounds (Divide).
Step 2: Convert the Pounds into euros (Multiply).
Final Answer: Sarah received 138 euros.
Example 3
Craig works on an oil rig in Norway for 3 months. He is paid in Norwegian Krone (NOK).
- Month 1: 42,500 NOK
- Month 2: 39,800 NOK
- Month 3: 45,200 NOK
The exchange rate is £1 = 13.50 NOK. Calculate his mean monthly earnings in pounds. (3 marks)
Step 1: Calculate his total earnings in NOK over the 3 months.
Step 2: Calculate his mean earnings in NOK.
Step 3: Convert his mean NOK earnings into Pounds (Divide).
Final Answer: His mean monthly earnings are £3,148.15.