How to calculate foreign exchange gain or loss

Written by eric moll
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How to calculate foreign exchange gain or loss
(Keith Brofsky/Photodisc/Getty Images)

Exchanging currency can be tricky, because rates of exchange often fluctuate unpredictably. It might be possible to make a hefty profit using dollars to buy euros, for example, and then using those euros to buy dollars a month or a year later when the rate changes--or you could just as easily lose money. Whether you make a gain or a loss with foreign exchange depends on the fee involved and on the relative values of currencies.

Skill level:

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  1. 1

    Look up the exchange rate of the first transfer (see Resources section). Let's say you had 1,000 euros on Aug. 29, 2009, and you exchanged them for dollars. The rate on that day was 1.43510 dollars to every euro.

  2. 2

    Subtract the bank fee, credit card fee, or cash exchange fee. This varies depending on how the transfer is made. For our example, we'll use a 0.5 per cent fee. This brings us down to 995 euros.

  3. 3

    Multiply the value from Step 2 by the exchange rate. In our example, 995 euros becomes £928.1.

  4. 4

    Look up the exchange rate for the second exchange. For our example, we'll assume that we didn't spend any of our new dollars, and we kept them under the mattress until June 8, 2010, when the dollar was doing much better relative to the euro. The exchange rate at this point was 0.83740 euros for every dollar.

  5. 5

    Subtract the exchange fees again. It's very important to know what sort of fees you're paying and how to minimise them. The lowest fees are usually found at your bank, not at an ATM or a money-exchange kiosk. Subtracting 0.5 per cent from our £928.1 gives us £923.5.

  6. 6

    Multiply the value from Step 5 by the exchange rate. In our example, our £923.5 gives us 1,189.76 euros.

  7. 7

    Find the difference between the initial investment and the answer in Step 6. In this case, we got lucky and made a profit of 189.76 euros.

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