What Is a Currency Exchange Rate?

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A currency exchange rate is the expense of one country's currency in another country's currency (Investopedia). As a result, it has two components: a local currency and the currency of another nation. An exchange rate involves one country's currency, known as the base currency, and another country's currency, known as the counter currency. In a straightforward reading of forex trade, the base currency is usually a foreign currency, while the other state's currency is typically the money to which it is countered. Many exchange rates around the world favor the US dollar as a primary currency, with other local currencies countering it, depending on the economy. Exchange rates are significant especially when considering the way in which the modern economies operate. They make a provision for business to be transacted across borders. It is important, therefore, to have an exchange rate as one country’s currency might not always be accepted in another country.

Exchange rates keep on fluctuating throughout the week as the currencies are actively being traded. This causes the prices of the currencies to rise and fall. If the currency readings are USD/CAD and the forex exchange reading is 1.22899, this means that for 1 U.S. dollar you have to give away 1.22899 Canadian dollars. The currency that appears first in the reading always represents a single measure of that currency. In this case, since USD is the first currency, it indicates that 1USD dollars are equal to 1.22899.in this case the currency that has more value is the US Dollar. On the other hand, when one wants to what it costs to exchange one Canadian dollar using the U.S. dollar, the formula is the 1 divide by the exchange rate.

For this case, 1 divided by 1.22899 = 0.8137. Therefore, it will take 0.8137 U.S dollars to exchange with one Canadian dollar. When reading this exchange rate, it will be shown as CAD/USD. For instance when one has to transact business like buying an iPhone in a shop in Canada how much US dollars would the customer need to convert? In this case, you will look at the CAD/USD exchange rate that reads 0.8137. The formula to calculate the amount of USD needed will be (CAD multiplied by the exchange rate) in this case if an iPhone 6 in Canada goes for CAD 899, a number of USD dollars the customer will need is;

899* 0.8137 = 731. 52, therefore the customer would need to have approximately USD 732 to convert to convert to Canadian dollars in order to acquire an iPhone 6 in Canada.

For instance, you have a company in Japan. The company has two employees whose payroll are in Japanese yen now you need to calculate the amount of US dollars you will send to Japan to take care of their salaries. If the employee's total earnings of the employees is 761 000 yens with the forex exchange rate reading is JPY/USD = 0.00895800 the amount the employer is required to send is JPY multiplied by the exchange rate i.e.

761000 * 0.00895800 = USD 6817.038

The employer who is in the United States would have to send approximately USD 6818 dollars in order to take care of the salaries of the two employees in Japan.

Exchange rates are critical in the current global economy. They have enabled numerous transactions to take place worldwide. The exchange rates are also used to gauge how a country is fairing on economically.

Works Cited

"How Important are Exchange Rates?" n.d. Pearsons Schools and Colleges website. 19 September 2017. .

Investopedia. "Exchange Rate." n.d. Investopedia website. 19 September 2017. .

December 28, 2022

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